UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


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in  2007  with  funding  from 

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BUSINESS   LAW 


A  TEXT-BOOK  FOB  SCHOOLS  AND  COLLEGES 


BY 

THOMAS  RAEBURN  ^HITE,  B.L.,  LL.B. 

OF  THE  PHILADELPHIA  BAB 

LECTUBEB  ON  LAW   IN  THE  UNIVEBSITY  OF 

PENNSYLVANIA 


WITH  AN  INTRODUCTION 

BY 

ROLAND  R  FALKNER,  Ph.D. 

ASSOCIATE   PBOFESSOB  OF  STATISTICS   IN  THE    UNIVEBSITY 
OF  PENNSYLVANIA 


SILVER,    BURDETT   AND    COMPANY 

NEW  YORK  BOSTON  CHICAGO 


T 

\5oo 


Copyright,  1900, 
By  SILVER,  BURDETT  AND  COMPANY. 


r    ■'.■     .      . 

Vn 

ft  CONTENTS 

PAGB 

Introduction vii 

Preface xi 

Suggestions  to  Teachers xiii 


PAET  I.     INTRODUCTORY 

Chap.        I.     The  General  Field  of  Law       ....        1 
Chap.       II.     Divisions  of  Municipal  Law     ....      12 


PART  II.     CONTRACTS 

Section      I.     Formation  of  Contracts    .....  17 

Chap.         I.     Nature  of  the  Contractual  Relation         .        .  17 

Chap.       II.     Capacity  of  the  Parties 19 

Chap.     III.     Offer  and  Acceptance 26 

Chap.     IV.     Form  and  Consideration 42 

Chap.       V.     Reality  of  Consent 71 

Chap.     VI.     Legality  of  Object 92 

Section  II.  Persons  affected  by  Contract  .  .  .  100 
Chap.        I.     Upon  whom  the  Formation  of  Contract  may 

confer  Rights  and  Liabilities  .  .  .  100 
Chap.       II.     Assignment  of  Contracts  by  the  Acts  of  the 

Parties 103 

Chap.     III.     Assignment  of  Contracts  by  Operation  of  Law  106 

Section  III.     Interpretation  of  Contracts    ....  114 
Chap.         I.     General  Rules  for  Interpretation  of  Contracts  114 
Chap.       II.     Explanation  and  Alteration  of  Written  Con- 
tracts      119 

Section  IV.     Discharge  of  Contracts 125 

Chap.        I.     Discharge  by  Agreement          .        .        .        .  125 

Chap.       II.    Discharge  by  Performance       ....  127 
iii 


H4H207 


iv  CONTENTS 


Chap. 

m. 

Chap. 

IV. 

Chap. 

v. 

Section    V 

.    R 

Chap. 

i. 

Chap. 

ii. 

Chap. 

in. 

Discharge  hy  Breach       .... 
Discharge  by  Impossibility  of  Performance 
Discharge  by  Operation  of  Law 


PAG* 

129 
134 
137 


Chap. 

I. 

Chap. 

II. 

Chap. 

III. 

Chap. 

IV. 

Chap. 

V. 

Chap. 

VL 

Remedies  for  Breach  of  Contracts         .        .  139 

Remedies  in  Courts  of  Law     ....  139 

Remedies  in  Courts  of  Equity          .        .        .  141 

How  Rights  of  Action,  arising  from  Breach  of 

Contract,  may  be  Discharged       .        .        .  145 

PAET   III.     SALES 

Essential  Characteristics          ....  148 

Who  may  Sell 151 

When  the  Title  to  the  Goods  Passes        .        .  167 

Conditional  Sales 161 

Warranties 166 

Mutual  Remedies  of  the  Parties       .        .        .  169 


PAET  IV.    NEGOTIABLE  CONTRACTS 

Essential  Characteristics  of  a  Promissory  Note  175 

Essential  Characteristics  of  a  Bill  of  Exchange  182 

How  the  Acceptance  must  be  Made         .        .  186 
How  Negotiable  Paper  Circulates    .        .        .188 

Liability  of  the  Maker  of  a  Note      .        .         .  191 

Liability  of  the  Acceptor  of  a  Bill  of  Exchange  194 

Liability  of  Drawer  and  Indorser    .        .        .  196 

Negotiations  of  Bills  and  Notes        .        .        .  213 

Conflict  of  Laws 228 

Checks 230 

PART  V.    CONTRACTS  OF  COMMON 
CARRIERS 

Section      I.     Carriers  of  Goods 233 

Chap.         I.     Essential  Characteristics  of  Common  Carriers  233 

Chap.       II.     Duties  of  Common  Carrier  toward  the  Public  237 
Chap.     III.     Liability  of  the  Common  Carrier     .        .        .241 

Chap.     IV.     Rights  of  the  Common  Carrier         .        .        .  250 


Chap. 

I. 

Chap. 

II. 

Chap. 

III. 

Chap. 

IV. 

Chap. 

V. 

Chap. 

VI. 

Chap. 

VII. 

Chap. 

VIII. 

Chap. 

IX. 

Chap. 

X. 

Chap. 

I. 

Chap. 

II. 

Chap. 

III. 

Chap. 

IV. 

Chap. 

V. 

Chap. 

VI. 

CONTENTS  V 

PAGE 

Section    II.     Carriers  of  Passengers     .....  252 

Chap.         I.     Duties  toward  the  Public         ....  252 

Chap.       II.     Liability  of  the  Carrier  of  Passengers      .        .  255 

Chap.     III.     Eights  of  the  Common  Carrier  of  Passengers  .  259 


PART  VI.    AGENCY 

Classes  of  Agents 260 

Creation  of  Relation  of  Principal  and  Agent  .  263 

Liability  of  Principal  for  Acts  of  Agent  .        .  267 

Liability  of  the  Agent  for  his  Acts  .        .        .  276 

Mutual  Duties  of  Principal  and  Agent     .        .  279 
How  the   Relation  of  Principal    and  Agent 

may  be  Terminated 284 


PAET  VII.    BUSINESS  ASSOCIATIONS 

Section     I.     Partnership 286 

Chap.         I.     Essential  Characteristics  of  a  Partnership        .  286 

Chap.       II.     Property  of  the  Partnership     ....  291 

Chap.     III.     Liability  of  the  Partners 296 

Chap.     IV.     Conduct  of  the  Business 301 

Section    II.    Corporations 306 

Chap.        I.     Essential  Characteristics  of  a  Corporation       .  306 
Chap.       II.     Liability  of    Stockholders  of    a  Corporation 

Regularly  Organized 314 

Chap.     III.     Liability  of  Stockholders  of  an  Irregular  Cor- 
poration          319 

Chap.     IV.     Rights  of  Stockholders 323 

Chap.       V.    Liability  of  a  Corporation        ....  329 

Chap.     VI.    Relation  of  a  Corporation  to  the  State     .        .  334 

Section  III.     Limited  Partnerships  and  Joint-Stock  Com- 
panies         336 

Chap.         I.     Limited  Partnerships 336 

Chap.       II.     Partnership  Associations  or  Joint-Stock  Com- 
panies    338 


INTRODUCTION 

THE  STUDY  OF   COMMERCIAL  LAW  IN   SCHOOL 
AND   COLLEGE 

The  selection  of  school  and  college  studies  is  made  from  the 
double  point  of  view  of  discipline  and  utility.  The  time-honored 
subjects  of  instruction  have  acquired  a  prestige  for  discipline  of 
the  mind  which  is  not  to  be  shaken,  and  when  advocates  of 
newer  branches  of  study  dwell  upon  the  utility  of  such  subjects, 
they  are  frequently  met  with  distrust,  which  finds  expression  in 
the  fear  lest  something  of  the  discipline  of  the  older  studies  be 
lacking  in  the  new.  Nor  can  it  be  doubted  that  the  utility  so 
frequently  claimed  for  newer  studies  would  be  purchased  at  too 
high  a  price  if  clear  training  of  the  intellect,  with  breadth  and 
readiness  of  mind,  be  sacrificed  to  gain  it.  These  several  proposi- 
tions form  the  basis  of  the  strife  which  in  recent  years  has  agitated 
educators,  and  which  has  flamed  with  peculiar  violence  about  all 
proposals  for  a  commercial  education.  It  is  not  to  stir  the  fires 
of  controversy,  or  to  balance  the  rival  claims  of  conservatives  and 
innovators,  that  we  have  repeated  the  watchwords  of  the  con- 
tending parties,  but  rather  to  discover  what  light  the  discussion 
may  throw  upon  the  place  and  purpose  of  the  study  of  commercial 
law  in  school  and  college. 

The  contrast  of  discipline  and  utility  has  sometimes  been  pushed 
so  far  that  disputants  seem  to  believe  that  disciplinary  studies 
cannot  be  useful,  nor  useful  studies  disciplinary.  A  distinguished 
jurist  is  reported  to  have  said  that  while  in  his  younger  days 
all  cases  appeared  to  him  either  white  or  black,  to  his  maturer 
vision  they  seemed  mostly  gray.  What  is  true  of  actions  of  law 
is  true  in  large  measure  of  other  controversies.  In  education, 
discipline  and  information  are  not  hostile,  but  complementary, 
they  are  two  means  of  promoting  mental  growth,  the  problem 
which  lies  at  the  root  of  all  serious  educational  effort.  They 
may,  indeed,  be  combined  in  unequal  proportions  in  different 
branches  of  study,  but  so  far  from  being  mutually  exclusive, 
they  are  generally  found  to  be  united.  Among  the  studies  which 
the  demand  for  a  practical,  or  rather  a  commercial,  education 

vii 


viii  INTRODUCTION 

has  introduced  into  schools  and  colleges,  few  present  so  happy  a 
blending  of  discipline  and  information  as  that  of  the  commercial 
law. 

The  study  of  the  law  disciplines  the  mind  in  precision  of 
thought  and  statement,  and  in  logical  reasoning.  Above  all  things, 
the  law  is  precise.  It  abhors  vagueness,  and  tolerates  no  loose- 
ness of  thought.  To  gain  precision  of  terms,  it  frequently  adopts 
modes  of  speech  which  seem  prolix  and  barbarous,  and  which 
have  been  the  frequent  butt  of  jest  and  ridicule.  But  even  this 
legal  phraseology,  with  which,  moreover,  an  elementary  study  of 
the  law  has  little  to  do,  has  its  uses.  Partly  because  of  their 
long-continued  use,  and  more  especially  because  they  have  been 
frequently  passed  upon  by  the  courts,  words  and  phrases  which 
provoke  the  merriment  of  the  layman  have  acquired  a  definiteness 
of  meaning  which  no  new  formulation  could  give. 

It  is  the  spirit  of  the  law  to  be  exact.  It  means  exactly  what 
it  says,  and,  under  the  searching  analysis  of  generations  of  judges, 
the  phrases  it  employs  have  a  precision  of  meaning  which  is  often 
lacking  in  other  sciences.  The  student  has  missed  the  point  of 
his  study  if  he  does  not  catch  this  spirit  of  preciseness,  and  it  is 
a  lesson  of  first  importance  to  the  pupil.  The  faculty  of  clearly 
stating  facts  in  terms  which  admit  of  no  question  is  one  of  the 
preeminent  marks  of  a  trained  mind.  But  this  mental  quality, 
like  all  others,  must  be  trained  to  be  perfected,  and  for  such  train- 
ing the  study  of  law  can  hardly  be  excelled.  One  need  not  be 
versed  in  all  the  refinements  of  legal  knowledge  to  appreciate  the 
truth  of  this  statement.  The  understanding  of  the  simple  rules 
which  govern  the  elementary  principles  of  law  requires  and  pro- 
motes a  grasp  of  language  and  a  comprehension  of  the  exact  pur- 
port of  verbal  statements,  whose  worth  cannot  be  estimated. 

With  precision  of  statement,  the  study  of  the  law  promotes 
clearness  of  thought.  Its  principles  are  but  few,  while  their  appli- 
cations are  innumerable.  To  apply  a  general  principle  to  a  par- 
ticular set  of  facts,  or  to  contrast  different  sets  of  facts  with  the 
legal  decisions  upon  them  and  thus  evolve  general  principles  of  law, 
offers  an  excellent  training  in  applied  logic.  As  the  student  pro- 
gresses, he  becomes  impressed  with  the  reasonableness  of  the  law 
as  it  unfolds  before  him  in  a  clear,  logical  system.  Many  times 
have  I  been  told  by  a  student  that  a  solution  stated  did  not  seem 
to  him  so  much  the  law  as  it  was  common  sense.  Nor  was  the 
student  wrong  in  his  intuitions,  for  with  the  homely  phrase  "  com- 
mon sense  "  we  are  prone  to  designate  what  we  deem  perfect  logic. 


INTRODUCTION  IX 

The  student  is  helped  and  stimulated  by  finding  so  much  that 
seems  to  him  common  sense  embodied  in  the  law.  It  strengthens 
his  reasoning  powers  to  find  their  conclusions  thus  confirmed,  and 
stimulates  them  by  directing  his  thoughts  into  new  channels,  and 
to  new  applications  of  what  he  has  learned. 

This  is  particularly  true  in  the  study  of  contracts,  which  forms 
so  large  a  part  of  the  commercial  law.  The  student  learns  that  it 
is  the  purpose  of  the  law  to  carry  out  the  clearly  expressed  inten- 
tions of  the  parties.  But  he  finds  that  parties  to  a  contract  fre- 
quently fail  to  express  their  intentions  in  a  clear  and  unequivocal 
fashion,  and  that  rules  of  law  grow  up  which  have  no  other  pur- 
pose than  to  establish  normal  rules  of  conduct.  The  law  assumes 
that  one  man  does  as  others  do  in  like  circumstances.  Thus  the 
inherent  reasonableness  of  the  law  is  impressed  upon  the  student, 
and  he  is  encouraged  to  test  its  rules  by  the  dictates  of  what  he 
calls  common  sense.  If  that  fails  to  reach  a  given  set  of  facts, 
he  has  arrived  at  a  point  where  he  can  see  clearly  that  in  such 
case  it  is  more  important  to  have  a  rule  than  that  the  rule  should 
be  one  way  or  the  other.  He  then  appreciates  that  there  may  be 
situations  where  the  courts  say  thus  and  so  is  the  law,  and  where 
legal  writers  flounder  in  their  attempts  to  furnish  an  explanation. 

So  much  for  the  disciplinary  advantages  of  the  study  of  the  law, 
which,  strong  as  they  are,  will  doubtless  appeal  with  greater  force 
to  the  teacher  than  to  the  pupil.  In  pointing  out  the  practical 
advantages  of  a  study  of  the  law,  we  need  have  no  fear  that  the 
student  will  fail  to  grasp  them.  Whether  or  not  he  intends  at 
some  future  day  to  practise  the  law  as  a  profession,  he  will  read- 
ily recognize  that  contracts,  notes,  sales,  agency,  partnership,  and 
transportation  concern  everybody.  He  does  not  have  to  be  told 
that  all  business  rests  upon  contracts  of  various  kinds,  and  he 
readily  comprehends  that  some  knowledge  of  the  law  is  a  valuable 
adjunct  to  any  one  who  has  business  affairs.  Indeed,  if  it  is 
pointed  out  to  him,  he  will  be  quick  to  grasp  the  fact  that  edu- 
cated men  of  the  world  must  of  necessity  have  some  knowledge  of 
the  familiar  laws  of  business  contracts.  Without  such  knowledge, 
gained  perhaps  through  a  long  period  of  business  experience,  they 
would  be  helpless  in  the  transaction  of  their  affairs. 

This  indicates  the  limits  within  which  the  study  of  the  law  can 
properly  be  introduced  into  schools  and  colleges.  Instruction  in 
law  must  here  aim  to  give  that  knowledge  of  the  law  which  forms 
a  part  of  the  mental  equipment  of  the  well-informed  man  of  affairs. 
Beyond  this  it  cannot  go.     Other  ideals  would  defeat  the  purposes 


X  INTRODUCTION 

of  general  instruction.  To  give  the  knowledge  of  the  expert,  or 
even  to  strive  to  do  away  with  the  necessity  for  expert  advice,  is 
not  to  be  thought  of.  In  short,  the  aim  of  this  instruction  should 
be  to  enable  a  man  to  know  when  he  needs  the  services  of  a  lawyer, 
rather  than  to  encourage  him  in  the  belief  that  he  can  dispense 
with  such  services. 

As  a  means  of  cultivating  mental  power  and  imparting  the 
degree  of  information  suggested,  the  study  of  the  law  has  an  appro- 
priate place  iu  schools  and  colleges.  The  experience  of  ten  years 
strengthens  the  writer's  conviction  that  the  study  is  interesting  to 
the  pupil  and  helpful  to  him.  Its  extremely  practical  bearing  on 
the  affairs  of  everyday  life  affords  a  host  of  opportunities  for  those 
mutual  discussions  of  teacher  and  pupil  which  are  among  the  most 
fruitful  experiences  of  the  class  room. 

Speculation  on  education  is  prone  to  outrun  its  practice.  It  is 
not  enough  to  decide  that  a  subject  is  fitted  for  instruction. 
Before  you  can  carry  an  ideal  into  practice,  you  must  find  the 
teacher,  and  before  it  becomes  general,  you  must  find  the  text-book 
which  adapts  the  subject  to  the  purposes  of  instruction.  I  believe 
that  Mr.  White  has  written  such  a  book,  and  I  congratulate  him 
upon  the  service  he  has  rendered  to  teachers.  It  has  been  my 
privilege  to  examine  carefully  the  manuscript  of  this  work,  and  to 
offer  such  suggestions  as  were  dictated  by  ten  years'  experience  in 
teaching  the  subject. 

Mr.  White  has  sought,  above  everything  else,  to  give  an  orderly 
and  logical  presentation  of  the  subject  of  commercial  law.  His 
work  is  designed  as  a  text-book,  and  in  no  sense  as  a  reference 
work.  So  far  as  possible,  technical  terms  have  been  avoided,  and, 
when  necessary,  have  been  explained.  There  has  been  no  attempt 
to  disguise  the  difficulties  of  the  law,  but  every  effort  has  been 
made  to  make  them  plain  by  lucid  exposition  and  frequent  illus- 
tration. Mr.  White  has  cherished  the  idea  that  a  book  upon  the 
law  need  be  neither  abstract  nor  disconnected.  As  a  member  of 
the  Law  Faculty  of  the  University  of  Pennsylvania,  it  has  been 
his  duty  to  expound  the  law  to  students,  and  he  has  sought  in  this 
book  to  present  in  simple  language  the  elements  of  the  law  in  such 
a  way  that  the  subject  gradually  unfolds  before  the  student,  and 
leads  him,  step  by  step,  in  a  natural,  logical  manner  from  one 
proposition  to  another.  In  this  effort,  he  has  been  unusually  suc- 
cessful, and  this  trait  of  the  book  will,  I  am  confident,  recommend 
it  to  teachers. 

ROLAND  P.   FALKNER. 


PREFACE 


The  object  of  this  book  is  to  present  the  elementary  principles 
of  law  relating  to  the  more  common  business  transactions,  in  a 
style  so  clear  and  free  from  technicality  that  they  can  be  readily 
understood  by  persons  unused  to  legal  phraseology.  Any  school- 
boy can  understand  these  principles  if  they  are  placed  before  him 
in  simple  English,  freed  from  legal  verbiage.  The  law  of  contracts 
has  been  said  to  be  nothing  more  than  the  law  of  common  sense. 
The  same  may  be  said  of  the  law  of  sales  and  agency.  The  dis- 
cussion of  negotiable  contracts,  common  carriers,  and  business 
associations  involves  the  use  of  somewhat  more  technical  lan- 
guage, but  the  fundamental  principles  of  these  also  are  neither 
difficult  nor  obscure.  It  is  the  hope  of  the  author  that  the  book 
will  afford  a  knowledge  of  these  subjects,  thorough,  if  elementary, 
and  that  it  will  do  it  in  such  a  way  that  the  student  may  not 
feel  that  he  is  studying  a  mere  compendium  of  information. 

The  first  part  of  the  book  is  devoted  to  a  brief  discussion  of  law 
in  general,  a  study  of  how  it  originated,  how  it  develops,  and  how 
it  has  been  divided  into  its  many  ramifications.  The  other  parts, 
in  order,  treat  of  the  subjects  mentioned  above.  They  do  not 
pretend  to  offer  a  complete  technical  knowledge  of  any  subject, 
but  it  is  believed  that  they  cover  the  leading  principles  in  a  thor- 
ough and  connected  manner. 

It  has  not  been  the  aim  of  the  writer  to  offer  any  new  legal 
principles.  The  originality  of  the  work  consists  only  of  its  arrange- 
ment and  the  manner  of  treating  its  subject-matter.  He  has  freely 
made  use  of  standard  text-books  and  collections  of  cases,  in  order 
to  arrange  the  subject  in  the  clearest  possible  manner,  and  to 
eliminate  whatever  might  be  omitted  without  detracting  from  the 
value  of  the  work  as  a  text-book.     The  more  technical  discussion 


Xll  PREFACE 

has  been  arranged  in  such  a  way  that  it  may  be  studied  or  not, 
as  the  teacher  sees  fit,  without  destroying  the  continuity  of  the 
text.  No  cases  have  been  cited,  as  the  work  is  not  intended  for 
the  use  of  lawyers. 

If  the  book  succeeds  in  giving  a  practical  insight  into  one  of  the 
greatest  of  sciences,  and  in  inspiring  a  love  for  it  which  shall  lead 
to  a  deeper  study,  it  will  have  accomplished  its  purpose. 

The  writer  desires  to  acknowledge  his  indebtedness  to  Professor 
Roland  P.  Falkner  for  his  invaluable  suggestions  and  advice,  and 
for  his  able  criticism  of  the  book  in  manuscript. 


THOMAS  RAEBURN   WHITE. 


Philadelphia, 
November,  1900. 


SUGGESTIONS  TO   TEACHERS 


Primarily  this  work  was  prepared  for  use  in  schools  and  col- 
leges. The  subject  of  which  it  treats  has  therefore  been  arranged 
with  a  view  to  its  being  taught  according  to  a  definite  plan. 

The  purpose  of  Part  I.  is  to  introduce  the  student  to  the  field 
of  legal  learning  —  to  show  him  how  the  law  has  been  built  up, 
and  to  give  him  some  idea  of  its  extent  and  its  many  subdivisions. 
Every  class  should  of  course  read  Part  I. 

Part  II.  leads  to  the  distinctive  branch  of  law  which  the  book 
investigates  —  that  treating  more  particularly  of  the  dealings 
between  man  and  man.  Nearly  all  the  subjects  covered  concern 
some  phase  of  the  law  of  contracts.  The  second  part  is  intended 
to  give  the  student  a  thorough  knowledge  of  the  meaning  of  a  con- 
tract. It  discusses,  with  some  minuteness,  its  essential  elements 
and  its  effect  upon  the  parties  bound  under  it.  This  part  of  the 
book  is  subdivided  into  sections.  Sect.  L,  dealing  with  the  "  For- 
mation of  Contracts,"  should  be  studied  in  its  entirety. 

In  Chap.  VI.,  Sect.  I.,  we  meet  for  the  first  time  a  paragraph 
which  is  marked  with  a  letter  (A)  instead  of  a  number.  The 
purpose  of  thus  designating  certain  paragraphs  by  letters  is  to 
indicate  those  which,  in  the  opinion  of  the  author,  are  either  too 
technical  for  the  more  elementary  students,  or  which  may  be 
omitted  in  the  study  of  the  subject  without  serious  loss.  It  will 
be  found  that  the  omission  of  these  paragraphs  will  not  disturb 
the  continuity  of  thought,  as  the  same  matter  is,  wherever  neces- 
sary, briefly  stated  in  a  previous  numbered  paragraph.  Such 
statements  are  brief  and  general,  serving  as  an  introduction  to  the 
more  detailed  examination  in  the  lettered  paragraphs,  which  may 
be  read  or  omitted,  as  may  seem  preferable. 


Xiv  SUGGESTIONS  TO  TEACHERS 

In  Sects.  II.,  III.,  IV.,  and  V.,  of  Part  II.,  many  lettered  para- 
graphs will  be  found.  In  some  cases,  whole  chapters,  vide  Chap.  V., 
Sect.  IV.,  consist  wholly  of  such  paragraphs.  In  such  cases  the 
entire  chapter  may  be  omitted.  With  very  young  classes,  Sects. 
II.,  III.,  and  IV.  may  be  omitted  altogether.  Sect.  V.,  however, 
should  be  given  at  least  a  brief  study  by  all  grades. 

Part  III.,  "  Sales,"  will  be  easily  understood  by  the  pupil  who 
has  studied  the  numbered  paragraphs  in  Part  II.  All  that  follows 
Part  II.  presupposes  a  study  of  these  paragraphs,  and  is  much 
briefer,  inasmuch  as  a  thorough  knowledge  of  elementary  principles 
is  assumed  to  have  been  gained. 

Part  IV.,  "Negotiable  Contracts,"  is  one  of  the  most  important 
sections  in  the  book,  but,  at  the  same  time,  one  of  the  most  diffi- 
cult. The  more  elementary  classes  may  do  well  to  omit  it,  and 
study  Parts  V.  and  VI.,  "  Contracts  of  Common  Carriers "  and 
"Agency,"  in  order,  as  these  are  short  and  easy  to  understand. 
All  classes,  however,  should,  if  possible,  take  "  Negotiable  Con- 
tracts "  in  its  order,  as  it  logically  comes  before  the  study  of  con- 
tracts of  common  carriers. 

Part  VII.,  "Business  Associations,"  while  it  treats  of  a  very 
interesting  and  important  subject,  is  the  most  difficult  part  of  the 
book.  Only  well-advanced  classes  should  attempt  to  give  it  a 
thorough  study. 

In  Parts  IV.  and  VII.  many  lettered  paragraphs  will  be  found. 
If  the  class  is  fairly  well  advanced,  and  time  will  permit,  it  will 
be  better  to  omit  nothing.  But  if  lack  of  time  prevents  a  thor- 
ough study,  or  if  the  class  has  difficulty  in  mastering  the  principles 
presented,  the  instructor,  by  observiug  the  lettered  paragraphs, 
will  know  what  may  safely  be  omitted. 

The  division  of  the  text  into  paragraphs  was  made  with  a  view 
to  assist  the  teacher  in  the  assignment  of  lessons.  The  division 
into  parts  and  chapters  was  made  on  the  basis  of  logical  sequence. 
In  assigning  lessons  in  the  longer  chapters  {e.g.,  in  Chap.  V., 
Sect.  I.  of  Part  II.),  it  will  be  well  to  note  the  natural  divisions 
of  the  chapter  {e.g.,  in  Chap.  V.,  Mistake,  Misrepresentation, 
Fraud,  etc.). 

T.  R.  W. 


PART  I 

INTRODUCTORY 


CHAPTER  I 

THE   GENERAL  FIELD  OF  LAW 

1.  Meaning  of  "  Law  "  ;  Natural  Laws.  —  "  Law,"  in 
its  broadest  signification,  means,  "a  rule  laid  down  or 
established."  In  one  way  or  another  the  word  neces- 
sarily becomes  familiar  to  us  all.  Students  of  science 
are  familiar  with  the  .rules  or  laws  which  govern  the 
nature  and  growth  of  plants  and  animals  ;  those  who 
have  studied  chemistry  know  that  certain  combinations 
of  elements  always  produce  a  given  result ;  students  of 
mechanics  know  that  certain  combinations  of  forces 
produce  a  force  of  definite  magnitude  and  certain  direc- 
tion ;  they  can  calculate  precisely,  even  the  strain 
supportable  by  a  given  structure.  Every  schoolboy 
knows  of  the  law  of  gravitation  which  governs  the 
attractions  of  bodies  for  each  other,  and  controls  the 
movements  of  the  sun  and  planets.  All  these  are 
natural  laws,  and,  incidentally,  laws  that  are  never 
broken.  Men  have  spent  their  lives  in  investigating 
them,  but  it  is  beyond  their  power  to  alter  them  in  the 
slightest  degree. 

1 


2  INTRODUCTORY 

2.  Laws  governing  Human  Action ;  their  Origin.  — 
When  we  turn  to  the  laws  which  control  human  action, 
we  are  confronted  by  a  very  different  situation.  No 
absolute  rules  were  laid  down  by  the  Creator  of  the 
Universe  to  govern  the  conduct  of  mankind.  While 
plants  conformed  strictly  to  the  laws  governing  their 
growth,  and  the  lower  animals  followed  the  unerring 
instinct  which  is  Nature's  law  for  them,  man,  by  virtue 
of  his  power  to  reason  and  to  will,  needed  something 
more  to  regulate  his  actions.  Primitive  man,  perhaps, 
had  no  more  need  of  laws  than  other  animals,  but  as 
his  power  to  think  developed,  he  realized  that  mere 
physical  instinct  was  not  a  sufficient  guidance  for  him. 
He  began  to  appreciate  the  fact  that  his  neighbor  had 
rights  as  well  as  himself.  He  saw  these  rights  often, 
almost  continuously,  in  conflict  with  his  own.  He 
perceived  that  if  he  was  not  to  live  in  continual  physi- 
cal warfare  it  was  absolutely  necessary  that  the  rights 
of  all  be  regulated.  Otherwise,  his  lot  would  be  merely 
that  of  the  wild  animal,  which  maintains  its  cave  dwell- 
ing by  physical  prowess,  and  is  compelled  to  abandon 
it  when  it  becomes  old  and  helpless.  A  little  later,  the 
conception  of  right  and  wrong  furnished  another  reason 
for  the  establishment  of  law.  "  Might  makes  right " 
is  not  consistent  with  moral  principle. 

In  order,  therefore,  to  protect  himself  in  the  quiet 
enjoyment  of  his  property  and  to  satisfy  his  conscience, 
man  was  compelled  to  make  laws  to  govern  his  own 
conduct.  These  have  grown  as  the  race  has  grown,  and 
are  continually  being  altered,  and,  inasmuch  as  man  has 
the  power  to  obey  them  or  not  as  he  chooses,  a  punish- 
ment, called  a  "sanction,"  has  been  annexed  to  the  breach 
of  human  laws  to  insure  individual  obedience  to  them. 


THE   GENERAL  FIELD  OF  LAW  3 

3.  Classification  of  Laws.  —  In  the  beginning  we  have 
defined  laws  as  "  rules,"  and  we  will  divide  these 
rules  into  two  general  classes  :  the  laws  of  Physical 
Science,  which  are  natural  laws,  and  the  laws  of  Human 
Action,  which  are  laws  created  by  man  for  his  own 
protection,  except  in  so  far  as  religious  writings  are 
considered  to  be  laws  laid  down  by  the  Deity.  The 
laws  of  Human  Action  again  are  divided  into  four 
general  divisions  :  the  Moral  Law,  the  Divine  or 
Revealed  Law,  International  Law,  and  Municipal  Law. 

4.  The  Moral  Law.  —  The  moral  law  has  never  been 
very  strictly  defined,  nor  is  it  very  clearly  definable. 
It  may  be  said  to  be  a  general  feeling  in  the  community, 
as  an  aggregate,  as  to  what  is  right  and  what  is  wrong. 
The  punishment  annexed  to  it  is  the  disapprobation 
which  the  community  visits  upon  the  individual  who 
oversteps  the  bounds.  It  changes,  at  least  in  some 
particulars,  with  every  decade,  and  differs  in  different 
sections  of  the  world,  though  a  few  cardinal  principles 
are  the  same  everywhere. 

5.  The  Divine,  or  Revealed  Law. — The  divine  or 
revealed  law  consists  of  those  commands  laid  upon 
men,  as  they  believe,  by  divine  beings.  They  are 
usually  contained  in  some  kind  of  religious  writings ; 
throughout  Christendom  they  are  found  in  the  Scrip- 
tures. This  law  is  astonishingly  similar  whether  you 
find  it  in  the  Bible,  in  the  Koran,  or  in  the  writings 
of  Confucius  or  of  Buddha.  This  is  no  doubt  true 
because  revelation  is  often  supplemented  by  man's 
conception  of  what  should  be,  or,  in  other  words,  by 
his  conscience ;  and  men's  consciences,  in  the  light  of 
the  education  they  have  had,  all  have  the  same  general 
tendency.      The   divine   law  has  a   double   means  of 


4  INTRODUCTORY 

enforcement.  It  offers  the  hope  of  a  reward  in  the 
future  existence  for  conformance  with  its  injunctions, 
and  threatens  eternal  punishment  as  its  "sanction." 
While  few  people  strictly  conform  to  this  law,  it 
is  safe  to  say  that  it  has  a  greater  influence  upon  the 
everyday  life  of  mankind  than  any  other,  and  should 
never  be  thought  of  inconsiderately. 

6.  International  Law.  —  International  law,  in  its  gen- 
eral or  public  sense,  consists  of  those  rules  or  precedents 
or  customs  by  which  independent  nations  have  agreed, 
either  expressly  or  tacitly,  to  govern  their  dealings 
with  each  other.  This  law  approaches  very  near  to 
Darwin's  law  of  the  survival  of  the  fittest,  and  some- 
times seems  to  be  subject  to  change  without  notice. 
There  are,  however,  a  great  many  rules,  such  as  those 
relating  to  the  safety  of  ambassadors,  by  which  the 
conduct  of  nations  is  so  far  regulated  that  few  would 
think  of  violating  them.  Only  strictly  independent 
nations  are  recognized  by  international  law. 

7.  Municipal  Law.  —  Municipal  law,  with  which  we 
are  concerned  in  this  work,  consists  of  those  rules  by 
which  the  civil  conduct  of  the  citizens  and  residents 
of  a  nation  is  regulated.  The  word  "municipal,"  as 
here  used,  means  all  laws  which  control  the  actions  of 
the  inhabitants  of  states  or  nations.  It  does  not  refer 
to  city  law  alone.  Notice  that  municipal  law  goes  no 
further  than  to  prescribe  a  rule  of  civil  conduct,  i.e.  the 
state  regulates  the  actions  of  its  citizens  only  so  far 
as  they  might  interfere  with  the  rights  of  other  men. 
Unlike  the  moral  and  divine  law,  it  exists  solely  for 
the  protection  of  men  against  each  other,  and  takes 
cognizance  of  actions  only.  When  it  has  performed 
that  function  its  work  is  done.     A  man  may  be  as 


THE  GENERAL  FIELD  OF  LAW  5 

wicked  as  he  pleases,  the  municipal  law  will  not  inter- 
fere with  him  so  long  as  he  does  not  interfere  with  any- 
body else.  Municipal  law  may  be  either  written  or 
unwritten. 

8.  Written  Law.  —  Written  or  statutory  law  consists 
of  positive  enactments  laid  down  by  the  legislating 
body  of  the  state,  as  acts  of  Parliament  in  England,  or 
acts  passed  by  Congress,  or  by  state  legislatures,  or  by 
city  councils.  These  acts  are  usually  enacted  to  meet 
some  need  peculiar  to  the  territory  to  which  they  apply. 
In  some  instances  they  are  simply  declaratory  of  known 
principles  of  law,  and  in  others  they  are  passed  for  the 
purpose  of  varying  or  contradicting  such  known  prin- 
ciples. According  to  the  ancient  principles  of  un- 
written law,  a  married  woman  could  not  hold  personal 
property,  or  make  contracts.  Now,  by  statutes  passed 
in  most  states  of  this  country,  her  disability  is  removed, 
and  she  may  act  as  freely  in  all  legal  matters  as  a  single 
woman. 

9.  Unwritten  Law ;  Civil  Law.  —  Unwritten  law, 
which  is  by  far  the  most  important  body  of  law,  is,  so 
far  as  concerns  English-speaking  people,  of  two  general 
divisions:  the  civil  law  and  the  English  common  law. 
The  civil  law  forms  the  basis  of  all  the  continental 
European  systems  of  jurisprudence,  and  has  very  largely 
affected  English  and  American  law.  It  consists  of  the 
laws  promulgated  by  the  Roman  People  from  the  time 
of  the  Tarquinian  kings  to  the  downfall  of  the  Empire, 
including  not  only  the  edicts  of  the  kings,  senate,  and 
emperors,  but  also  legal  decisions  and  opinions  of 
learned  writers  bearing  upon  the  same.  This  great 
body  of  laws  was  codified,  i.e.  was  arranged,  classified, 
and  promulgated  during  the  reign  of  the  Emperor  Jus- 


6  INTRODUCTORY 

tinian  and  by  his  orders.  This  was  in  the  sixth  cen- 
tury A.D.  This  compilation  is  known  as  the  Justinian 
Code.  A  reformation  of  this  code  was  made  by  Napo- 
leon, and  the  Code  Napoldon  is  used  in  France  to-day. 
Various  modifications  of  the  latter  code  form  a  very 
important  part  of  the  law  of  those  countries  at  that 
time  under  the  sway  of  Napoleon,  particularly  Italy, 
Holland,  Germany,  and  Spain.  Napoleon's  work  as  a 
law-maker  may,  to  some  extent,  account  for  the  domi- 
nance of  military  power  in  France,  Napoleon  himself 
being  a  thorough  believer  in  the  efficacy  of  military 
force,  and  a  soldier  rather  than  a  statesman  or  a  lawyer. 

10.  Importance  of  the  Civil  Law.  —  The  study  of  the 
civil  law  is  important  to  us  because  it  has  very  materially 
affected  our  own  law.  When  William  the  Conqueror 
took  the  English  throne,  in  1066  A.D.,  he  carried  with 
him  not  only  the  French  language  and  French  customs, 
but  also,  to  a  considerable  extent,  French  laws.  More- 
over, some  parts  of  our  country,  notably  Louisiana, 
have  been,  and  still  are  to  a  large  degree,  governed 
by  French  law  rather  than  by  the  common  law.  All 
the  territory  which  we  formerly  acquired  from  Spain, 
as  well  as  our  recent  acquisitions,  did  and  do  contain 
the  Spanish  system  of  law,  which  of  course  is  the  civil 
law. 

11.  The  Common  Law  of  England ;  its  Origin.  —  The 
common  law  of  England,  inherited  by  us  from  the 
mother  country,  is  by  far  the  most  important  to  Ameri- 
can students.  It  is  indigenous  to  English  soil  and 
had  its  origin  in  custom  or  usage.  In  very  ancient 
times,  before  there  were  any  organized  courts,  and  when, 
indeed,  there  was  little  attempt  at  administration  of 
justice  on  the  part  of  the  ruling  power,  the  dealings 


THE   GENERAL  FIELD  OF  LAW  7 

of  men  with  each  other  depended  entirely  upon  custom. 
There  was  merely  a  general  feeling  that  in  a  certain 
particular  situation  a  certain  line  of  conduct  should  be 
followed.  If,  in  that  situation,  some  individual  acted 
otherwise  than  was  customary,  the  disapprobation  of 
the  community  was  visited  upon  him. 

In  ancient  times,  in  England,  one  man  generally 
owned  a  very  large  tract  of  land  upon  which  he  had  a 
great  many  tenants.  It  was  the  custom  for  a  certain 
portion  of  this  land  to  be  set  apart  for  a  common  pas- 
turage for  the  cattle  of  all  the  tenants.  Suppose,  after 
several  generations,  the  new  owner  of  the  land  at- 
tempted to  abolish  this  right  of  pasturage.  He  would 
meet  with  a  great  deal  of  opposition,  even  if  there 
were  no  law  to  prevent  him  from  doing  as  he  chose. 
Once  accepted  as  the  guiding  rule  of  men's  actions, 
and  after  courts  were  established  for  the  purpose  of 
enforcing  justice  between  individuals,  these  customs 
were  recognized  as  binding  laws.  It  then  became 
necessary  to  discriminate  between  customs  which  had 
been  in  existence  so  long  as  to  become  laws,  and  cus- 
toms which  had  not  yet  become  firmly  established,  and 
therefore  not  binding  upon  any  one.  To  make  use  of 
a  quaint  expression  which  we  often  find  among  old 
English  writers,  if  a  custom  had  existed  "  from  a  time 
whereof  the  memory  of  man  runneth  not  to  the  con- 
trary," it  became  a  law.  This  meant  that  if  in  the 
memory  of  the  oldest  inhabitants  there  was  no  time 
when  this  custom  had  not  been  observed,  it  was  deemed 
binding  upon  every  one. 

12.  First  Digest  of  Customs.  —  As  may  readily  be  sur- 
mised, these  customs  were  binding  only  in  the  com- 
munity in  which  they  had  been  observed.     A  custom 


8  INTRODUCTORY 

might  not  extend  over  a  whole  kingdom,  nor  per- 
haps over  a  whole  county,  but  might  apply  only  to  a 
certain  neighborhood.  The  result  of  this  was  that  a 
great  number  of  customs,  more  or  less  conflicting  with 
each  other,  grew  up.  This  rendered  the  work  of  the 
judges  doubly  difficult,  for  they  had  to  decide,  first, 
whether  the  custom  existed,  and,  secondly,  whether  it 
applied  in  the  particular  case  before  them.  It  will  be 
remembered,  from  the  study  of  English  history,  that  at 
the  time  when  King  Egbert  came  to  the  throne  of  Kent 
the  island  was  divided  up  into  a  number  of  small,  but 
independent,  kingdoms.  The  customs  or  usages  in  each 
one  of  these  kingdoms  necessarily  differed,  to  quite  a 
large  extent,  from  each  other.  After  King  Egbert  had, 
by  many  years  of  warfare,  succeeded  in  uniting  all  Eng- 
land under  one  king,  there  was  almost  hopeless  conflict 
of  customs. 

When  Alfred  the  Great  came  to  the  throne,  he  found 
time  among  all  his  other  labors  to  have  the  customs 
or  laws  of  all  England  harmonized,  as  far  as  possible, 
digested,  and  arranged  in  a  great  book  in  such  a  way 
that  they  could  be  conveniently  referred  to.  For  this 
work  King  Alfred  the  Great  was  called  "  Legum  Con- 
ditor"  —  founder  of  the  law.  For  the  first  time  the 
whole  body  of  the  common  law  of  England  really. had  a 
recognized  existence,  and  so  the  digest  of  King  Alfred 
is  the  fountain  head  of  that  great  body  of  law  which 
now  exists. 

13.  How  the  Common  Law  has  grown.  — Since  the  time 
when  King  Alfred  first  gathered  the  laws  together  in 
one  book,  the  common  law  has  grown  to  its  present 
vast  proportions  in  the  following  way.  Suppose  a 
dispute,  arose  between  two  individuals,  whom  we  will 


THE   GENERAL   FIELD   OF   LAW  9 

call  A  and  B,  in  a  court  of  law  at  that  time.  The 
judges,  after  examining  the  records  of  the  law  in  King 
Alfred's  book,  and  after  listening  carefully  to  the  facts 
of  the  case,  which  perhaps  were  previously  decided  by 
a  jury,  rendered  a  decision  as  to  which  party  was  in  the 
right.  In  giving  this  decision  they  would  state,  also, 
their  reasons.  Suppose,  now,  a  dispute  between  C  and 
D  arose  at  some  later  period  about  the  same  point. 
The  judges,  after  listening  to  the  facts,  would  search 
the  records  and  find  the  decision  of  the  previous  case 
between  A  and  B.  They  would  then  decide  the  case 
between  C  and  D  in  the  same  waj\  When  other  cases 
involving  the  same  or  very  similar  questions  arose 
thereafter,  they  would  be  controlled  by  the  decisions 
in  the  cases  between  A  and  B  and  C  and  D.  A  judge 
is  not  at  liberty  to  ignore  the  decisions  of  the  courts 
which  have  gone  before  him,  for  those  decisions  are  a 
part  of  the  common  law,  and  "  no  man  is  wiser  than  the 
law."  The  countless  decisions  of  courts  in  England 
and  in  all  the  states  in  this  country,  the  records  of 
which  fill  thousands  of  printed  volumes,  are  binding 
upon  courts  which  decide  cases  at  this  day.  Each 
new  decision  becomes  a  part  of  the  common  law,  and 
is  itself  a  precedent. 

Some  writers  declare  that  the  common  law  itself 
has  always  existed,  just  as  the  law  of  gravitation  has 
always  existed,  and  all  that  judges  do  is  to  inves- 
tigate what  the  law  is  and  apply  it  to  individual 
cases.  Really,  however,  the  common  law  is  built 
of  nothing  but  these  same  judicial  decisions.  Theo- 
retically, the  common  law  never  changes  any  more 
than  the  law  of  gravitation  changes.  Really,  it  is 
changing  every  day.    While,  as  we  have  indicated,  the 


10  INTRODUCTORY 

decisions  which  have  gone  before  are  binding,  yet  as 
new  situations  arise,  the  varying  conditions  of  the 
times  appealing  to  the  common  sense  of  the  judges, 
leads  them,  slowly,  it  is  true,  though  surely,  to  mould 
the  common  law  into  conformity  with  the  new  con- 
ditions. If  this  were  not  so  the  common  law  could 
not  have  served  the  purpose  which  it  has  served  in 
the  history  of  the  world.  It  continues  to  grow,  and, 
gradually,  with  beautiful  adaptability,  changes  to  meet 
advancing  needs. 

14.  Authority  of  Judicial  Decisions  not  Absolute.  — 
We  do  not  mean  to  say  that  a  judicial  decision  cannot 
be  departed  from  under  any  circumstances.  If  a  line 
of  judicial  decisions  has  decided  a  question  in  a  par- 
ticular way  for  a  number  of  3rears,  and  public  policy 
demands  an  absolute  change,  sometimes  it  is  made  by 
the  courts  of  common  law  themselves.  It  is  not  often, 
however,  that  a  common  law  court  has  the  courage 
flatly  to  disregard  foregoing  decisions.  The  judges 
usually  say  that  the  remedy  in  such  a  case  lies  with 
the  legislature.  If  the  common  law  in  some  particular 
point  is  not  consistent  with  the  advancement  of  civili- 
zation, the  legislature  will  step  in  and  absolutely 
change  it.  Again,  when  we  say  that  a  judicial  deci- 
sion is  a  precedent,  understood  in  this  limited  sense, 
we  do  not  mean  that  it  is  binding  upon  all  common 
law  courts,  wherever  situated,  but  it  is  binding  only 
upon  the  courts  of  the  jurisdiction  in  which  the  decision 
was  rendered.  English  decisions  bind  English  courts ; 
New  York  decisions  bind  New  York  courts,  etc. 

There  are  in  every  state  courts  of  first  resort  and 
courts  of  final  resort.  If  A  and  B  have  a  lawsuit, 
their  case  is  first  decided  in   a   court  of   first  resort. 


THE   GENERAL  FIELD   OF  LAW  11 

These  courts  have  different  names  in  various  states. 
Sometimes  they  are  called  Common  Pleas  Courts,  some- 
times Circuit  Courts,  sometimes  they  go  by  other  names. 
If  one  of  the  parties  to  a  lawsuit  is  dissatisfied  with 
the  decision  or  verdict  in  the  court  of  first  resort,  he 
may  appeal  to  the  court  of  final  resort.  This  is  usually 
called  the  Supreme  Court  of  the  state.  A  decision 
when  rendered  there  is  final,  unless  there  is  a  constitu- 
tional question  involved,  which  will  warrant  taking  the 
case  to  the  Supreme  Court  of  the  United  States.  The 
decision  there  is  absolutely  final,  and  if  it  is  in  con- 
flict with  the  decision  of  the  state  Supreme  Court  or 
with  that  of  a  court  of  first  resort,  the  decision  of  the 
Supreme  Court  of  the  United  States  will,  of  course, 
prevail. 


CHAPTER  II 

DIVISIONS  OF  MUNICIPAL  LAW 

1.  Classification  of  Municipal  Law  with  Respect  to  its 
Objects.  —  Now,  having  seen,  to  some  extent,  how  the 
law  is  formed,  we  will  devote  our  attention  to  an 
investigation  of  its  objects.  These  are  twofold:  the 
protection  of  the  rights  of  individuals,  and  redress 
for  wrongs  which  have  been  inflicted  upon  them. 
Therefore,  if  we  classify  the  law  with  respect  to  its 
objects,  we  may  distinguish  two  general  divisions: 
First,  that  law  which  defines  the  rights  which  men 
possess  and  explains  what  constitutes  infringement 
upon  those  rights,  which  we  call  "Substantive  Law"; 
Second,  that  law  which  furnishes  the  machinery  by 
which  criminals  are  punished,  and  wrongs  redressed, 
and  which  we  call  "Remedial  Law." 

2.  Substantive  Law ;  Rights  of  Persons.  —  In  discuss- 
ing substantive  law  we  will  consider  it  in  two  divi- 
sions. The  first  relates  to  "  Rights  "  and  the  second 
relates  to  "Wrongs."  By  "Rights,"  in  this  sense,  we 
mean  legal  rights,  rights  which  the  law  recognizes 
and  will  protect ;  and  by  "  Wrongs  "  we  mean  wrongs 
which  are  recognized  to  be  such  by  the  law  and  for 
which  the  law  offers  a  redress.  Following  the  classi- 
fication used  by  Blackstone,  Rights  may  be  subdivided 
into  the  "  Rights  of  Persons "  and  the  "  Rights  of 
Things."      The  "Rights  of  Persons"  is  that  branch 

12 


DIVISIONS  OF  MUNICIPAL  LAW  13 

of  substantive  law  which  deals  with  the  rights  which 
are  annexed  to  the  persons  of  men,  as  distinguished 
from  those  which  affect  property  alone.  These  include 
the  rights  which  every  man  has  to  enjoy  personal 
security,  personal  liberty,  and  private  property.  It 
also  defines  the  various  rights  and  liabilities  arising 
from  the  relation  of  Master  and  Servant,  Husband  and 
Wife,  Guardian  and  Ward,  Parent  and  Child,  etc. 
This  branch  of  law  deals  not  only  with  individual  per- 
sons, but  with  the  liabilities  and  privileges  of  corpora- 
tions-as  well. 

3.  The  Rights  of  Things.  —The  "Rights  of  Things  " 
is  that  branch  of  substantive  law  which  deals  with 
the  acquisition  and  ownership  of  real  and  personal 
property,  together  with  the  annexed  rights  and  liabili- 
ties. The  subjects  treated  in  this  book  belong,  for  the 
most  part,  to  this  division  of  substantive  law. 

4.  Public  Wrongs.  —  Wrongs,  which  you  will  remem- 
ber as  the  second  general  division  of  substantive  law, 
are  of  two  kinds:  public  wrongs  and  private  wrongs. 
Public  wrongs  are  those  committed  against  the  whole 
community,  as  distinguished  from  wrongs  which  harm 
only  certain  individuals.  Of  such  a  nature  is.  any  act 
which  disturbs  the  peace  of  the  commonwealth  or  is 
a  menace-  to  the  security  and  general  welfare  of  the 
people  at  large.  All  such  acts  are  called  crimes  or 
misdemeanors,  according  to  the  magnitude  of  the 
offence,  and  are  punished  by  public  authority. 

5.  Private  Wrongs. — Private  wrongs  are  not  of  them- 
selves dangerous  to  the  community,  but  inflict  loss 
upon  one  or  more  individuals.  They  are  known  as 
torts.  Among  the  most  common  of  such  wrongs  are 
cases  where  one  person  injures  another  by  means  of 


14  INTRODUCTORY 

some  careless  or  negligent  action.  The  one  who  com- 
mits a  private  wrong  must  make  restitution  to  the  one 
upon  whom  he  has  inflicted  the  loss.  He  may  be  com- 
pelled to  do  so  by  the  injured  party, who  resorts  to  a 
suit  at  law  for  that  purpose. 

6.  Remedial  Law ;  Common  Law  Courts.  —  The  second 
great  division  of  municipal  law,  which  we  have  called 
"Remedial  Law,"  deals  with  the  organization  and  com- 
position of  courts  and  the  manner  in  which  one  may 
enforce  his  claims  therein.  It  is  not  our  purpose  to 
go  into  an  extensive  description  of  the  courts  or  the 
manner  of  suing  in  them ;  but  it  should  be  pointed  out 
that  there  are  two  great  systems  of  justice  which  are 
administered  in  this  country.  The  courts  of  common 
law  we  have  already  referred  to.  They  were  the 
earliest  courts  organized  in  England,  and  were  trans- 
planted to  this  country  when  our  ancestors  came  over 
to  make  this  their  new  home.  These  courts  are  gov- 
erned by  common  law  rules  and  are  strictly  bound  by 
precedent,  as  has  already  been  explained. 

7.  Courts  of  Equity.  —  There  is,  also,  a  second  system 
which  has  developed  in  England  and  in  the  United 
States.  A  great  many  years  ago  it  became  evident 
that  the  common  law  did  not  offer  ample  remedies  for 
all  the  wrongs  which  were  inflicted  upon  individuals. 
The  common  law  could  punish  a  man  for  not  carrying 
out  a  contract  which  he  had  made,  and  could  compen- 
sate the  other  party  to  the  contract  by  decreeing  the 
payment  of  a  sum  of  money  by  the  person  who  had 
broken  the  agreement;  but  it  had  no  power  to  make 
either  or  both  parties  carry  out  the  agreement  to  the 
letter.  The  common  law  could  force  a  man  to  pay  any 
damages  which  he  had  inflicted  upon  another  by  reason 


DIVISIONS  OF  MUNICIPAL  LAW  15 

of  trespassing  upon  his  land  and  tearing  down  his 
house;  but  it  could  not  act  upon  the  person  of  an 
intending  wrong-doer  and  prevent  him  from  doing  the 
unlawful  act,  even  though  that  act  would  result  in 
an  irreparable  injury  to  another,  who  could  not  be 
compensated  in  money  for  the  loss  of  his  homestead. 
These  are  two  illustrations  of  cases  in  which  the 
common  law  failed  to  do  justice, by  reason  of  the  rigid 
rules  under  which  the  courts  had  administered  it  for  so 
man}'  years. 

In  order  to  meet  this  need  the  system  of  equity  courts 
was  invented  and  gradually  grew  up  in  England.  A 
court  of  equity  differs  from  a  court  of  law,  so  called, 
first,  in  that  it  offers  what  are  known  as  "  Extraordinary 
Remedies,"  namely,  remedies  not  recognized  by  the 
common  law;  and  second,  in  that  it  is  not  bound  by 
iron-clad  rules  when  it  is  seeking  to  administer  justice. 
These  courts  of  equity,  under  various  names,  were 
transplanted  to  this  county.  In  some  states  the  courts 
of  common  law  administer  both  common  law  and  equity; 
in  others  there  are  still  the  two  distinct  courts;  as  we 
proceed,  we  shall  understand  more  clearly  the  difference 
between  legal  and  equitable  remedies. 

8.  Development  of  Various  Phases  of  Law  relating  to 
Property.  —  Having  thus  taken  a  rapid  glance  over  the 
whole  field  covered  by  municipal  law,  we  return  for  a 
more  careful  consideration  of  the  "Rights  of  Things." 
The  first  branch  of  the  law  to  attain  form  was  that 
which  related  to  land.  This  was  very  natural,  since  in 
ancient  times  land  was  the  principal  and  almost  the 
only  property  of  value.  As  the  community  grew  older, 
however,  and  other  means  of  livelihood  besides  the  till- 
ing of  soil  came  to  be  largely  followed,  new  branches 


16  INTRODUCTORY 

of  law  were  developed  to  govern  and  regulate  men's 
actions  toward  each  other  in  these  new  relations.  The 
acquisition  and  ownership  of  movable  property  gave 
rise  to  the  law  of  personal  property.  As  men  began 
to  engage  in  trade,  they  formed  agreements  with  one 
another  to  do  or  not  to  do  specified  things.  The  neces- 
sity of  holding  each  other  to  their  bargains  gave  rise 
to  the  law  of  contracts.  When  commerce  became  more 
extensive,  so  that  men  often  wished  to  deal  with  others 
in  foreign  lands,  the  law  of  agency  became  a  necessity. 
To  facilitate  freedom  of  exchange,  negotiable  paper 
came  into  use,  together  with  the  rules  governing  its 
transfer  from  hand  to  hand.  In  more  recent  times  the 
law  relating  to  corporations  has  become  of  vastly 
greater  relative  importance  than  formerly,  on  account 
of  the  continued  multiplication  of  that  form  of  business 
association.  Without  going  further  into  the  subdivi- 
sions of  the  law  relating  to  property,  it  can  readily  be 
seen  why  they  have  developed  as  the  needs  of  the 
community  called  them  forth. 


PAKT   II 

CONTRACTS 


SECTION   I 
FORMATION  OF  CONTRACTS 


CHAPTER   I 

NATURE  OF  THE  CONTRACTUAL  RELATION 

1.  Definition.  —  We  are  to  discuss  in  this  book  the 
law  relating  to  the  more  common  business  transactions, 
and  more  particularly  the  law  of  contract  in  its  vari- 
ous phases.  We  naturally  think  of  a  contract  as  being 
an  agreement  between  two  or  more  persons.  Many 
authors  so  describe  it.  This  definition,  however,  does 
not  accurately  define.  An  agreement  between  two  or 
more  parties  may  create  a  contract,  but  the  contract 
itself  is  something  more  —  it  is  a  legal  relation  between 
the  parties.  This  legal  relation  confers  rights  and 
liabilities  upon  both.  If  you  have  agreed  to  sell  one 
hundred  bushels  of  wheat  to  B,  and  he  has  agreed  to 
buy,  each  of  you  has  certain  rights  over  the  other. 
You  have  a  right  to  force  B  to  accept  and  pay  for  the 
grain ;  he  has  the  right  to  have  you  furnish  it  to  him 
upon  payment  of  the  price  agreed  upon. 

17 


18  CONTRACTS 

2.  Why  Contract  and  Agreement  are  not  the  Same.  — 
It  is  this  relation  between  the  parties  which  is  really 
what  we  mean  when  we  use  the  word  "contract."  As 
we  have  pointed  out,  the  agreement  may  operate  to 
create  the  relation,  but  is  not  itself  a  contract. 

The  proof  of  this  lies  in  two  facts.  First,  it  is  possible 
to  make  a  contract  without  an  agreement.  Suppose 
I  agree  to  sell  you  my  brown  horse  for  one  hundred 
dollars  —  I  really  mean  my  black  horse,  but  you  accept 
the  offer  of  the  brown  horse  as  I  make  it.  Is  there  a 
contract  ?  According  to  some  very  eminent  authorities, 
there  is.  If  this  be  true,  then,  you  have  a  contract 
founded,  not  upon  an  actual  agreement,  or,  as  it  is 
called,  a  meeting  of  the  minds  of  the  two  parties,  but 
founded  upon  the  words  which  passed  between  them. 
Second,  all  agreements  are  not  contracts.  If  you  make 
an  agreement  to  dine  with  a  friend  there  is  an  agree- 
ment, but  no  contract.  There  is  no  contract  because 
the  agreement  was  not  intended  to  create  legal  rela- 
tions. A  mere  social  engagement  is  not  an  agreement 
upon  which  the  law  will  found  a  contract. 

From  these  illustrations  it  can  be  understood  why  it 
is  incorrect  to  say  a  contract  is  an  agreement.  At 
the  same  time,  it  may  simplify  matters  somewhat  to 
use  the  more  common  phraseology  and  define  a  contract 
to  be  an  agreement.  When  we  say  that,  however,  we 
may  add  that  the  agreement  must  be  one  which  is 
enforceable  at  the  law  or  else  it  cannot  be  a  contract. 
There  are  a  number  of  things  besides  the  agreement 
which  we  must  take  into  consideration  before  we  can 
say  that  a  contract  exists.  These  will  be  explained 
when  we  take  up  the  discussion  of  the  essential  ele- 
ments of  a  contract  in  the  next  chapter. 


CHAPTER  II 

CAPACITY  OP  THE  PARTIES 

1.  Essential  Elements  of  a  Valid  Contract.  —  In  order 
that  the  agreement  may  create  a  contract  enforceable  at 
the  law,  there  must  be  present  the  following  essential 
elements :  (1)  The  parties  must  be  capable  of  making 
a  contract.  (2)  There  must  be  a  definite  expression  of 
agreement  between  them,  usually  consisting  of  an  offer 
made  by  one  and  accepted  by  the  other.  (3)  There 
must  be  what  is  known  as  a  "  consideration  "  for  the 
contract,  i.e.  some  benefit  must  have  been  given  to  the 
party  making  the  promise,  or  some  disadvantage  must 
have  been  suffered  by  the  other,  or  else  the  agreement 
must  be  expressed  in  a  particular  form,  known  as  a 
"contract  under  seal."  (4)  The  expression  of  agree- 
ment must  be  genuine,  i.e.  it  must  not  have  been 
brought  about  by  deception  or  by  force.  (5)  The  object 
contemplated  by  the  parties  must  be  legal. 

2.  What  is  Meant  by  Capacity  of  the  Parties.  —  It 
goes  without  saying  that  parties  cannot  contract  unless 
they  are  legally  capable  of  contracting.  Generally 
speaking,  everybody  can  contract,  except  those  who  for 
some  reason  are  incapable  of  contracting,  —  those  who 
are  under  some  disability.  The  discussion  of  the 
capacity  of  the  parties,  therefore,  resolves  itself  into  a 
discussion  of  the  various  disabilities  which  may  pre- 

19 


20  CONTRACTS 

vent  an  otherwise  capable  person  from  contracting. 
There  are  only  two  disabilities  that  it  will  be  necessary 
to  dwell  upon  at  any  length,  namely,  infancy  and 
lunacy.  According  to  the  old  common  law,  a  married 
woman  was  unable  to  make  a  contract  except  in  certain 
very  limited  situations ;  but  this  disability,  called  the 
disability  of  "coverture,"  has  been  entirely  removed  in 
England  and  in  most  states  in  this  country. 

3.  Contracts  of  Infants.  —  An  infant  is  any  person 
under  the  legal  age  of  majority;  this  age  is  usually 
twenty-one  years  for  a  male ;  the  rule  is  generally  the 
same  for  females,  though  in  some  states  they  are  of  age 
at  eighteen.  No  person  is  capable  of  making  a  binding 
contract  until  he  has  reached  his  majority.  But  sup- 
pose an  infant  of  the  age  of  eighteen  years  attempts 
to  make  a  contract  and  enters  into  an  agreement  which, 
if  made  by  a  person  of  full  age,  would  create  a  legal 
obligation.  That  contract,  if  we  may  so  call  it,  will 
remain  in  a  state  of  suspense  until  the  infant  becomes 
of  age.  It  may  then  become  binding  upon  him  or  of 
no  validity  whatever,  depending  upon  whether  he 
expresses  his  willingness  to  go  on  with  it  or  repudi- 
ates it  altogether.  Suppose  you,  being  an  infant,  agree 
to  purchase  my  house.  After  you  become  twenty-one 
years  of  age  you  come  to  me  and  tell  me  that  you  are 
of  the  same  mind,  and  wish  me  to  consider  the  matter 
as  settled  according  to  our  original  contract.  You 
cannot  thereafter  draw  back  —  you  will  be  bound. 
But  if,  instead  of  agreeing  to  go  on  with  your  contract, 
you  had  told  me  you  had  changed  your  mind  and  had 
decided  not  to  purchase,  then  the  contract  would  be 
at  an  end,  and  I  would  be  unable  to  force  you  to  accept 
and  pay  for  the  house. 


CAPACITY  OF  THE  PARTIES  21 

4.  Infants  may  repudiate  Contracts  during  Minority.  — 
The  question  now  arises  whether  the  infant,  suppos- 
ing he  has  made  an  agreement  purporting  to  create  a 
contract,  is  able  to  repudiate  this  contract  before  he 
becomes  of  age.  It  is  clear  that  he  cannot  ratify  it,  for 
he  did  that  impliedly  when  he  first  made  it,  and  no  sub- 
sequent ratification  would  be  of  any  validity  until  the 
infant  has  become  of  age.  But  he  may  repudiate  a 
contract  during  minority,  so  that  it  absolutely  ceases 
to  have  any  legal  existence  from  that  time.  Suppose, 
while  you  are  an  infant,  you  purchase  an  automobile, 
agreeing  to  pay  therefor  one  thousand  dollars.  Acci- 
dentally it  runs  into  a  river,  and  is  entirely  destroyed. 
You  then  conclude  that  you  do  not  wish  to  buy  it  and 
you  go  to  the  seller  and  repudiate  your  bargain.  He 
has  no  redress.  Had  you  retained  the  automobile  he 
could  make  you  give  it  back  to  him,  but  now  that  it 
has  been  destroyed,  without  fault  on  your  part,  he 
loses  everything  unless  you  choose  to  pay,  for  your 
contract  does  not  bind  you.  If  you  had  destroyed 
the  automobile  wilfully  or  carelessly,  he  might  have 
recovered  damages  against  you  for  mistreating  his 
property ;  but  he  can  recover  nothing  on  account  of  the 
agreement  which  you  made. 

5.  Infants  must  Affirm  or  Repudiate  upon  Coming  of 
Age.  —  When  the  infant  becomes  of  age  he  must, 
within  a  reasonable  time,  choose  which  he  will  do, — 
ratify  or  disaffirm  his  contract.  Whichever  he  does,  he 
will  then  be  bound  accordingly.  If  the  infant  ratifies 
his  contract  by  signifying  his  intention  to  abide  by 
it,  it  is  treated  as  being  binding  from  the  first  day 
it  was  made.  If  he  repudiates,  it  is  considered  as 
never  having  been  of  any  validity.      The  ratification 


22  CONTRACTS 

or  repudiation  dates  back  to  the  time  of  the  original 
agreement. 

6.  How  Ratification  or  Disaffirmance  may  be  brought 
about.  —  This  ratification  or  disaffirmance  of  the  con- 
tract, whichever  it  may  be,  need  not  be  brought  about 
by  express  words.  It  is  not  necessary  for  the  infant 
to  say,  "I  repudiate,"  or  "I  ratify."  Either  rati- 
fication or  disaffirmance  may  be  brought  about  solely  by 
actions.  Suppose,  while  under  age,  you  purchase  X's 
house,  move  into  the  property,  and  treat  it  as  your 
own.  After  you  become  of  age  you  remain  in  posses- 
sion, continuing  to  live  there  for  two  years.  You 
have,  by  your  conduct,  ratified  the  agreement  and  are 
bound  to  pay  the  price.  On  the  other  hand,  if  you 
move  out  soon  after  attaining  your  majority,  cease  to 
exercise  any  acts  of  ownership  over  the  premises,  re- 
fuse to  pay  X  any  more  money,  and  demand  the  return 
of  that  which  you  have  paid  him,  you  have,  by  your 
conduct,  disaffirmed.  Few  cases  are  so  plain  as  this, 
and  it  is  often  very  difficult  to  determine  whether  the 
acts  do  or  do  not  amount  to  a  ratification. 

It  would  be  out  of  place  in  this  elementary  book  to 
go  more  minutely  into  this  particular  phase  of  the 
question,  but  one  rule  may  be  pointed  out  as  universally 
correct  by  which  to  interpret  conduct  in  such  cases. 
If  the  contract  is  executed,  i.e.  if  the  parties  have 
performed  their  agreement,  and,  after  reaching  his 
majority,  the  infant  does  nothing  to  repudiate,  but 
treats  the  contract  as  continuing,  then,  after  the  ex- 
piration of  a  reasonable  time,  it  will  be  deemed  to 
have  been  ratified.  If,  however,  the  contract  be  execu- 
tory, i.e.  if  neither  party  has  performed  (e.g.  if,  in  the 
illustration,  though  the  contract  had  been  made  to  sell 


CAPACITY   OF  THE   PARTIES  23 

the  house,  possession  had  not  been  given),  then  a 
failure  on  the  infant's  part  to  change  the  existing  con- 
dition of  affairs  would  result  in  a  repudiation.  After 
the  lapse  of  a  reasonable  time  an  executory  contract  is 
considered  to  be  disaffirmed. 

7.  Infant's  Contracts  which  are  Binding.  —  There  are 
two  exceptions  to  the  rule  that  an  infant's  contracts 
are  never  binding.  These  exceptions  are  contracts  for 
necessaries  and  marriage  contracts. 

Contracts  for  necessaries  are  held  binding  for  the 
protection  and  welfare  of  the  infant.  If  he  could  not 
bind  himself  to  purchase  the  necessities  of  life,  he 
would  be  in  danger  of  starvation  in  the  midst  of  plenty. 
The  only  puzzling  question  which  arises  in  such  cases 
is,  What  are  necessaries?  That  is  decided  by  taking 
into  consideration  the  wealth,  position,  mode  of  life, 
etc.,  of  the  infant.  A  horse  and  carriage  has  been 
decided  to  be  a  necessary  for  a  wealthy  infant,  who  had 
been  ordered  by  his  physician  to  ride  for  his  health. 
Clothing,  board  and  lodging,  educational  expenses,  etc., 
are  always  necessaries.  Surveying  instruments  for  a 
student  of  civil  engineering,  microscopes  for  a  student 
of  biology,  tools  or  instruments  necessary  for  the  practice 
of  a  profession  in  which  an  infant  is  engaged,  would 
all  be  necessaries.  On  the  other  hand,  "a  wild  animal 
or  a  steam  roller  "  probably  never  would  be.  Between 
these  two  extremes  there  are  many  articles  that  come 
very  close"  to  the  border  line.  A  bicycle  was  formerly 
classed  as  a  luxury.  Now  it  has  in  some  instances 
become  a  necessary. 

Not  only  must  the  article  be  one  properly  termed 
a  necessary,  but  the  amount  expended  must  not  be 
greater  than  could  reasonably  be  considered  indispen- 


24  CONTRACTS 

sable  to  the  comfort  of  the  infant.  If  he  is  very  ex- 
travagant in  dress,  the  salesman  should  be  on  his  guard, 
for  the  "  necessary  "  rule  will  not  protect  him.  In  one 
case  where  a  young  man  had  purchased  seventeen  pairs 
of  trousers,  the  court  came  to  the  conclusion  that  such 
a  large  number  at  one  time  was  not  necessary,  and  his 
contract  did  not  bind  him.  The  clothing  which  would 
be  necessary  for  a  university  student  would  not  be  con- 
sidered so  for  a  trolley-car  conductor.  The  court  at- 
tempts to  judge  each  case  on  its  merits,  and  to  adjudge 
those  articles  necessaries  that  can  fairly  be  said  to 
be  essential  to  the  comfort  of  the  infant,  taking  into 
account  all  his  external  surroundings.  No  precise 
rules  can  be  laid  down. 

Marriage  contracts  of  infants  are  held  binding  for 
reasons  of  public  policy,  provided  the  parties  are  old 
enough  to  know  what  they  are  doing. 

8.  Contracts  of  Lunatics.  —  A  lunatic  in  the  eye  of 
the  law  is  a  person  of  unsound  mind,  or,  to  use  the  legal 
phrase,  one  who  is  non  compos  mentis.  Mere  eccen- 
tricity must  not  be  taken  for  insanity,  nor  should  it  be 
supposed  that  a  mere  temporary  loss  of  reason  will 
affect  a  contract  made  by  a  man  during  a  lucid  inter- 
val. As  a  general  rule,  the  contracts  of  a  lunatic  may 
be  declared  invalid,  if  the  other  party  to  the  contract 
dealt  with  him  knowing  him  to  be  a  lunatic,  or  after  a 
commission  had  declared  him  to  be  insane.  If,  how- 
ever, a  man  contracts  with  another  apparently  sane, 
but  who,  unknown  to  him,  is  really  insane,  most  courts 
will  uphold  the  contract.  The  question  is  a  disputed 
one,  and  there  is  no  precise  rule  which  can  safely  be 
laid  down.  A  contract  made  by  a  lunatic  for  the  neces- 
saries of  life  will  bind  him  as  in  the  case  of  an  infant's 
contracts  for  necessaries. 


CAPACITY   OF   THE   PARTIES  25 

9.  Where  One  Party  is  Intoxicated.  —  Gross  intoxica- 
tion is  one  form  of  lunacy.  Very  often  a  man  will 
attempt  to  avoid  a  contract  by  stating  that  he  was  drunk 
at  the  time  he  made  it.  If  he  was  so  much  under  the 
influence  of  liquor  as  to  be  entirely  insensible  to  what 
he  was  doing,  and  the  other  party  knowingly  took 
advantage  of  him,  there  is  no  contract.  The  courts, 
however,  are  very  slow  to  let  a  man  off  from  his  con- 
tract upon  this  plea,  and  it  must  be  very  clear  that  he 
was  entirely  unable  to  transact  business. 


CHAPTER    III 

OFFER  AND  ACCEPTANCE 

1.  Offer  and  Acceptance  must  be  Definite.  —  Before  the 
contract  can  be  created  there  must  be  an  expression 
of  agreement  between  the  contracting  parties.  As  we 
tried  to  show  in  the  preceding  section,  it  is  not  always 
necessary  that  there  be  an  actual  agreement  perhaps, 
but  it  is  absolutely  necessary  that  there  should  be  a 
definite  expression  of  agreement.  This  usually  takes 
place  by  one  party  making  an  offer  which  the  other  party 
accepts.  The  simplest  form  of  such  an  expression  of 
agreement  might  be  illustrated  as  follows:  A  says  to 
B,  "I  will  sell  you  my  horse  for  one  hundred  dollars." 
B  replies,  "I  accept."  The  contract  is  complete.  If, 
however,  either  the  offer  or  acceptance  be  indefinite 
there  is  no  contract.  If  A  had  said  to  B,  "I  will 
sell  you  either  of  my  horses  for  one  hundred  dollars," 
and  B  had  replied,  "I  accept  your  offer,"  there  would 
have  been  no  contract  because  there  was  no  definite 
acceptance.  If  B  had  said,  "  I  accept,  and  choose  the 
black  horse,"  there  would  have  been  a  contract,  for  in 
that  case  the  expression  of  agreement  would  have  been 
definite  and  complete.  In  all  cases  where  the  offer  is 
in  the  alternative,  the  one  to  whom  the  offer  is  made 
must  state  which  alternative  he  accepts.  A  wrote  to 
B,  saying,  "  We  will  ship  you  as  many  tons  of  pig-iron 

26 


OFFER  AND  ACCEPTANCE  27 

as  you  wish."  In  his  letter  he  named  two  prices,  one 
price  if  B  should  order  the  iron  to  be  shipped  by  canal, 
and  a  higher  price  if  he  should  order  it  to  be  shipped 
by  river.  B  replied,  "Ship  me  one  thousand  tons." 
There  was  no  contract  because  B  did  not  state  which 
alternative  he  accepted. 

In  the  same  way,  if  there  be  any  ambiguity  in  the 
offer,  even  a  definite  acceptance  will  not  create  a  con- 
tract. A  wrote  to  B,  "  We  have  a  few  jars  which  we  will 
be  willing  to  sell,"  naming  a  price.  B  replied,  "I  ac- 
cept, and  will  take  five  hundred  of  them."  There  was 
no  contract  in  that  case  because  the  offer  was  not  defi- 
nite. A  few  jars  may  mean  any  number  from  five  to  five 
thousand.  The  court  said  A  had  not  offered  to  sell  any 
specific  number,  and  as  he  did  not  have  as  many  as  five 
hundred,  he  was  not  liable  for  breach  of  contract.  In  all 
cases  both  the  offer  and  the  acceptance  must  be  definite. 

2.  Acceptance  must  be  Absolute.  —  Not  only  must  the 
offer  and  acceptance  be  definite,  but  the  latter  must  be 
unconditional  and  identical  with  the  terms  of  the  offer. 
The  one  who  makes  the  offer  is  called  the  offeror,  and 
the  one  to  whom  the  offer  is  made  is  called  the  offeree. 
We  shall  often  refer  to  these  two  parties  by  these 
names.  A  offered  B  a  farm  for  five  thousand  dollars. 
B  replied,  "  I  accept,  subject  to  terms  to  be  agreed  upon 
between  your  attorney  and  mine."  It  was  decided  by 
the  court  that  no  contract  had  been  made,  because  B's 
acceptance  was  coupled  with  a  condition  —  it  was  not 
absolute.  If  the  offeree  undertakes  to  introduce  new 
conditions  into  the  contract  not  embodied  in  the  offer, 
his  acceptance  is  not  absolute.  A  offered  to  buy  B's 
farm  for  ten  thousand  dollars ;  B  declared  he  accepted 
the  offer,  and  sent  a  contract  to  A  for  him  to  sign. 


28  CONTRACTS 

This  contract  stipulated  that  A  should  pay  a  deposit 
of  ten  per  cent,  of  the  purchase  money,  and  that  he 
should  complete  the  payment  of  the  remainder  within 
a  limited  time.  A  refused  to  sign ;  B  claimed  that  by 
so  doing  he  had  broken  his  contract,  but  the  court  said 
there  was  no  contract,  because  B  had  attempted  to 
introduce  new  terms  into  the  agreement. 

3.  Offer  and  Acceptance  may  take  place  by  Words  or 
Conduct.  —  Having  ascertained  the  essential  character- 
istics of  offer  and  acceptance,  we  will  next  consider 
how  this  expression  of  agreement  may  be  brought 
about.  Is  it  necessary  that  in  all  cases  the  offeror 
should  use  the  words  "I  offer,"  etc.,  and  that  the 
offeree  should  definitely  say,  "I  accept"?  Very  few 
contracts  are  made  in  that  manner.  It  is  not  neces- 
sary that  any  particular  form  of  words  be  used.  An 
offer  may  be  made  either  by  words  or  by  acts.  The 
merchant  who  exposes  his  goods  for  sale,  by  his  conduct 
offers  them  to  the  public  upon  the  payment  of  their 
price.  If  you  go  to  the  store  and  take  the  goods,  you 
have  by  your  act  accepted  the  offer  of  the  merchant, 
and  the  contract  is  complete.  Street-car  companies,  by 
running  their  cars  over  the  streets  of  a  city,  offer  to 
carry  any  persons  who  choose  to  avail  themselves  of 
their  services  and  to  pay  for  them.  If  you  board  a  car, 
you  accept  their  offer  and  thereby  agree  to  pay  the  fare. 

Sometimes  it  is  possible  for  a  man  to  accept  the  offer 
of  another  without  even  doing  an  act.  Suppose  some 
one  does  a  piece  of  work  for  you  without  your  request, 
but  you  know  he  is  doing  it  and  offer  no  objection, 
and  the  circumstances  being  such  that  no  reasonable 
man  would  think  the  work  was  being  done  for  nothing. 
You,  by  your  conduct,  have  accepted  his  offer  to  give 


OFFER  AND  ACCEPTANCE  29 

you  his  services  in  return  for  what  they  are  reasonably 
worth,  and  you  are  bound  accordingly. 

4.  Conduct  must  be  Unequivocal.  —  It  must  not  be  sup- 
posed, however,  that  in  such  cases  a  man  may  force  his 
services  upon  another  and  drag  him  into  a  contract  to 
which  he  really  gave  no  consent.  The  conduct  must  be 
of  such  a  nature  that  the  court  is  perfectly  well  satisfied 
the  parties  knew  what  they  were  doing,  and  impliedly 
assented  to  the  closing  of  the  bargain.  A  asked  B, 
who  was  a  contractor,  to  make  an  estimate  as  to  the 
cost  of  altering  and  repairing  certain  offices.  B  did  so, 
and  sent  the  estimate  to  A.  A  made  certain  altera- 
tions in  the  specifications  and  sent  the  papers  back  to 
B,  saying,  "  If  these  changes  are  satisfactory,  you  may 
begin  work  any  time."  Without  saying  anything 
further,  B  began  work,  purchasing  lumber,  materials, 
etc.  Subsequently,  A  refused  to  carry  out  the  terms 
of  the  paper.  When  B  sued  for  damages,  the  court 
said  there  was  no  contract,  because  B  had  not  definitely 
accepted  A's  proposition.  This  decision  is  a  very 
close  one.  If  A  had  clearly  said,  "I  shall  consider 
your  beginning  of  the  work  as  an  acceptance  of  the 
offer,"  there  would  without  doubt  have  been  a  contract, 
but,  under  the  circumstances,  the  court  thought  A  had 
intended  B  to  answer  him  definitely  whether  he 
accepted  the  altered  terms  of  the  specifications.  By 
saying  B  could  begin  any  time,  he  merely  meant  that, 
after  B  had  accepted  the  offer,  he  need  not  delay  about 
commencing  the  work. 

5.  Offer  need  not  be  Made  to  a  Specific  Person.  — 
Having  seen  that  the  offer  must  be  definite  in  its  terms, 
the  inquiry  naturally  arises,  Must  it  be  definite  as  to 
the  person  to  whom  it  is   made?     Must  the  offer  be 


30  CONTKACTS 

made  to  one  specific  individual,  or  may  it  be  made  to  a 
number,  any  one  of  whom  has  the  privilege  of  accept- 
ing? It  goes  without  saying  that  the  offer  must  be 
made  by  an  ascertained  person,  but  as  long  as  it  is 
accepted,  sooner  or  later,  by  some  particular  individual, 
it  is  not  necessary  that  the  offer  itself  should  have  been 
specifically  directed  to  any  one  individual.  The  offer 
may  be  made  to  the  public.  In  the  illustration  of  the 
street-car,  the  offer  was  made  to  all  the  people  in  the 
city.  As  soon  as  the  intending  passenger  boards  a  car, 
he  thereby  notifies  its  officers  that  he  accepts  the  offer, 
and  completes  the  contract  between  himself  and  the 
street-car  company.  If  you  advertise  in  the  papers, 
offering  a  reward  for  the  return  of  a  lost  article, 
the  man  who  brings  back  the  lost  article,  by  his  con- 
duct, accepts  the  offer  which  you  have  made,  and  com- 
pletes the  contract.  In  such  cases  it  is  not  necessary 
that  the  one  who  accepts  the  offer  should  have  notified 
the  offeror  that  he  is  going  to  do  so;  it  is  sufficient  if 
he  does  some  definite  act,  signifying  that  he  does  accept. 
A  curious  case  which  involves  this  point  was  decided 
in  England  a  few  years  ago.  A  patent  medicine  com- 
pany, called  the  "Carbolic  Smoke  Ball  Company,"  in 
advertising  a  patent  medicine  for  the  prevention  of 
influenza,  offered  to  give  the  sum  of  one  hundred  pounds 
to  any  person  who  contracted  influenza  immediately 
after  taking  their  smoke  balls  three  times  daily  for  two 
weeks,  as  explained  in  the  printed  directions.  An 
enterprising  woman  used  the  smoke  balls  as  directed 
for  two  weeks,  and  then,  accidentally  or  otherwise, 
contracted  a  severe  cold  and  sued  the  company.  The 
company  objected  that  there  was  no  contract,  because 
this  woman  had  not  notified  them  of  her  acceptance  of 


OFFER  AND  ACCEPTANCE  SI 

their  proposition;  but  the  court  refused  to  take  this 
view  of  the  matter,  and  permitted  her  to  recover  the 
one  hundred  pounds.  They  said  the  fulfilling  of  the 
conditions  on  her  part,  namely,  the  use  of  the  smoke 
balls  according  to  the  directions,  was  a  sufficient 
acceptance,  and  it  was  not  necessary  for  her  to  send 
word  to  the  company  that  she  was  going  to  try  the  effi- 
cacy of  their  medicine. 

6.  Offer  must  be  Consciously  Accepted  by  an  Ascertained 
Person.  —  We  have  seen  that  an  offer  may  be  made  to 
the  public,  but  it  is  clear  that  there  can  be  no  contract 
created  until  some  specific  individual  has  accepted  the 
offer.  The  question  might  arise  in  this  connection  as 
to  what  is  meant  by  acceptance.  It  is  quite  possible 
that  some  member  of  the  public  may  do  an  act  which  in 
itself  would  constitute  an  acceptance  of  your  offer  had 
he  been  aware  that  you  had  made  the  offer;  but  would 
it,  if,  at  the  time  he  had  made  the  contract,  he  was  in 
ignorance  that  an  offer  had  been  made  ?  Suppose  you 
offer  ten  dollars  for  the  return  of  a  lost  dog.  X  finds 
the  dog  and  returns  him  to  you,  but  he  does  not  know 
that  you  have  offered  ten  dollars  for  the  return  of  the 
animal  until  after  he  has  delivered  him  over  to  you  and 
has  gone  away.  He  subsequently  sees  the  offer  which 
you  made,  comes  back  to  you,  and  demands  the  reward. 
Can  he  get  it?  There  is  some  conflict  of  authority 
upon  that  point;  but  it  now  seems  to  be  pretty  well 
settled  that  he  cannot.  A  man  cannot  be  said  to  have 
accepted  an  offer  of  which  he  knew  nothing.  There  is 
no  contract  until  the  offer  has  been  consciously  accepted 
by  an  ascertained  person. 

7.  Contract  complete  when  Acceptance  is  Communicated. 
—  Having  seen  that  the  offer  must  come  to  the  knowl- 


32  CONTRACTS 

edge  of  the  offeree,  we  next  ask,  When  is  the  contract 
complete?  You  remember  the  illustration  in  which  the 
contractor  was  told  that  if  he  was  satisfied  with  certain 
changes  made  in  the  specifications,  he  could  begin  work 
at  once;  he  certainly  accepted  the  offer,  and  yet  there 
was  no  contract.  Why?  Because  the  acceptance  was 
not  communicated  to  the  offeror.  A  man  may  make 
you  an  offer  and  you  may  mentally  accept  it,  but  no 
legal  rights  are  created  until  you  have  communicated 
that  intention  to  him.  A's  insurance  policy  on  his 
barn  had  expired.  He  went  to  B,  the  agent  of  the 
company,  and  left  the  papers  with  him,  telling  him  to 
renew  the  policy.  By  this  act  A  made  an  offer.  B 
said  nothing,  but  merely  accepted  the  papers.  Before 
the  new  policy  was  made  out,  A's  barn  was  destroyed 
by  fire.  The  question  then  naturally  arose  whether 
the  company  was  liable  for  the  amount  of  the  insur- 
ance. The  court  decided  that  it  was  not,  because  B 
had  not  definitely  communicated  to  A  his  acceptance 
of  the  offer.  The  contract  is  complete  when,  and  not 
until,  the  acceptance  has  been  communicated  either  by 
words  or  by  conduct. 

8.  Acceptance  Communicated  when  sent  in  the  Manner 
Indicated  by  the  Offeror.  —  Having  seen  that  the  accept- 
ance must  be  communicated,  we  next  ask,  When  is  it 
communicated?  Is  it  communicated  when  the  offeree 
has  sent  word  to  the  offeror,  even  though  the  informa- 
tion does  not  reach  the  latter,  or  is  it  communicated 
only  when  the  offeror  actually  knows  that  the  accept- 
ance has  been  sent?  That  question  has  given  rise  to 
much  litigation.  As  we  shall  see,  in  many  cases 
neither  party  is  at  fault,  and  yet  the  communication 
never  reaches  the  offeror. 


OFFER  AND  ACCEPTANCE  33 

The  rule,  which  we  shall  understand  better  later  on, 
is  that  if  the  offeree  sends  his  acceptance  in  the  manner 
indicated  by  the  offeror,  at  that  moment  the  contract  is 
complete,  although  the  acceptance  has  not  as  yet 
actually  reached  the  latter.  A  had  negotiated  for  a 
policy  of  insurance  upon  his  barn.  He  wrote  a  letter 
accepting  the  offer  which  an  insurance  company  had 
made  to  him,  and  enclosing  a  check  in  payment  of  the 
first  premium,  on  July  10.  The  letter  reached  the 
office  of  the  company  on  July  12.  On  the  night  of  July 
11  the  barn  was  burned  down.  Here  it  was  very 
material  whether  the  contract  was  closed  when  A  mailed 
the  check  on  the  10th  or  when  the  company  received  it 
on  the  12th.  If  it  was  completed  on  the  mailing  of  the 
check,  then  the  company  would  be  liable  for  the  amount 
of  the  policy.  If  not  until  the  12th,  the  owner  would 
have  to  bear  the  loss  himself,  because  at  that  time 
there  was  no  building  to  insure.  The  court  decided 
that  the  mailing  of  the  letter  closed  the  contract,  and 
the  company  was  bound  to  pay  the  loss. 

9.  Contract  complete  even  when  Letter  of  Acceptance  is 
lost  in  the  Mails.  —  If  you  strictly  apply  the  rule  which 
we  have  laid  down,  you  will  see  that  there  is  a  perfect 
contract,  even  if  the  actual  communication  of  the  ac- 
ceptance never  reaches  the  offeror.  If  it  be  literally 
true  that  the  contract  is  complete  when  the  acceptance 
has  been  sent  in  the  manner  in  which  the  offeror  indi- 
cates, then  the  actual  arrival  of  the  letter  or  telegram 
at  its  destination  is  immaterial.  A  wrote  to  B,  offer- 
ing to  sell  him  lumber  at  so  much  per  thousand  feet. 
B  replied  immediately,  accepting  the  offer.  B's  letter 
of  acceptance  was  lost  in  the  mail,  and  A,  not  having 
received  it,  after  a  reasonable  time,  sold  the   lumber 


34  CONTRACTS 

to  another  party.  A  has,  it  would  seem,  every  reason 
to  believe  that  B  has  not  accepted  his  offer,  because 
he  hears  nothing  from  him.  On  the  other  hand,  B  has 
accepted,  and  is  relying  upon  A  to  fulfil  the  contract. 
That  looks  like  a  hard  case  for  some  one,  and  so  it  is. 
It  is  one  of  those  very  close  legal  questions  —  so  close 
that  it  would  be  decided  differently  if  the  case  arose 
in  different  states.  In  most  states  the  contract  is  com- 
plete upon  the  mailing  of  the  letter,  and  A  would  have 
to  respond  in  damages  for  having  failed  to  fulfil  it. 
In  Massachusetts,  however,  the  courts  have  decided 
that  there  is  no  contract  until  the  letter  of  acceptance 
actually  reaches  the  offeror. 

10.  Contract  probably  Complete  when  Letter  containing 
Offer  is  Delayed.  —  Sometimes  it  is  not  the  letter  of 
acceptance  which  is  delayed,  but  the  letter  containing 
the  offer.  In  such  a  case,  supposing  the  offeree  an- 
swers promptly  according  to  the  directions  contained 
in  the  offer,  would  the  contract  bind  the  offeror?  A 
wrote  to  B  offering  to  sell  him  some  wool,  and  direct- 
ing B  to  reply  by  return  mail.  A  misdirected  the 
letter  so  that  B  did  not  receive  it  until  three  days 
later  than  he  otherwise  would  have  done,  but  he  then 
replied  immediately  as  A  had  directed.  The  price  of 
wool  was  fluctuating,  so  that  A,  after  waiting  until 
after  the  time  when  he  expected  to  have  received  a 
reply,  sold  the  wool  to  some  one  else.  A  does  not 
seem  to  be  in  fault,  for  he  has  waited  a  reasonable  time. 
B  does  not  seem  to  be,  for  he  replied  at  once  upon 
receiving  the  letter.  Who  should  suffer  the  loss? 
The  court  decided  that  there  was  a  contract,  and  that 
A  was  liable  in  damages  for  its  breach. 

Consider  that  decision  for  a  moment.     Do  you  think 


OFFER  AND  ACCEPTANCE  35 

it  correct  to  say  that  neither  one  of  the  parties  was  at 
fault?  It  seems  that  B,  upon  observing  the  date  of  the 
letter  to  him,  should  have  known  it  had  been  delayed, 
and  that  in  all  probability  the  wool  had  been  disposed 
of.  Suppose  A  is  a  dealer  in  perishable  fruit,  such  as 
peaches,  which  will  sometimes  spoil  in  a  day  after 
picking,  and  which  must  be  shipped  at  once.  Suppose 
A,  who  lives  in  Delaware,  offers  the  product  of  a  day's 
picking  to  a  dealer  in  Philadelphia,  and  requests  an 
answer  the  same  evening.  His  letter  is  delayed,  and 
upon  receiving  no  answer  he  sells  the  peaches  else- 
where. Could  the  buyer  accept  the  offer  several  days 
later,  and  hold  A  responsible  ?  It  seems  clear  that  he 
could  not,  and  such  is  the  law  in  cases  like  this,  where 
the  goods  are  perishable. 

11.  No  Contract  if  Acceptance  is  sent  Contrary  to  In- 
structions. —  We  have  seen  that  if  the  acceptance  be  sent 
according  to  the  manner  in  which  the  offeror  suggests, 
the  risk  of  miscarriage  is  upon  him,  and  the  contract  is 
complete  as  soon  as  the  acceptance  has  been  properly 
sent.  But  suppose  the  offeree  disregards  the  directions 
of  the  offeror  and  sends  his  acceptance  in  another  man- 
ner. In  such  a  case  as  that  the  offeree  has  himself 
assumed  the  risk  of  miscarriage,  and  there  is  no  con- 
tract until  the  knowledge  of  the  acceptance  actually 
comes  to  the  offeror.  A,  who  was  a  dealer  in  flour, 
sent  a  message  to  B  by  the  man  who  drove  his  de- 
livery wagon,  offering  to  purchase  flour  of  him.  He 
requested  that  B's  answer  be  sent  back  to  him  by  the 
wagon.  B,  thinking  he  could  reach  A  sooner  by  mail, 
sent  his  answer  in  that  way,  accepting  the  offer. 
The  wagon  returned  before  the  mail,  and,  upon  receiv- 
ing no  answer,  A  concluded  B  would  not  sell  at  the 


36  CONTRACTS 

figures  he  named,  and  made  other  arrangements.  It 
is  clear  that  there  was  no  contract,  for  B  deliberately 
disregarded  A's  instructions. 

12.  Offeror  Assumes  Risk  of  Miscarriage.  —  In  some 
situations  it  must  be  a  hardship  whichever  way  you 
decide.  Suppose  you  send  me  an  offer  by  your  office 
boy,  requesting  an  answer  to  be  sent  back  in  the  same 
way.  The  boy  is  killed  while  on  his  way  back  with 
the  acceptance.  Neither  of  us  is  to  blame,  yet  you 
would  be  bound.  Or,  again,  to  borrow  an  illustration 
from  Sir  William  Anson,  suppose  you  send  a  mes- 
senger across  a  lake  conveying  an  offer  to  me.  You 
request  me  to  light  a  fire  on  a  certain  peak  at  10  p.m. 
if  I  accept  your  offer.  I  light  the  fire ;  there  is  a  heavy 
fog  over  the  lake  so  that  you  cannot  see  it.  Who  is 
to  blame  ?  Nobody,  and  yet  you  are  responsible.  The 
reason  why,  in  all  these  cases,  the  offeror  is  held 
responsible  is  because  he  is  the  one  who  voluntarily 
acts.  He  begins  the  proceeding  and  takes  the  risk 
that  an  acceptance  communicated  in  the  manner  which 
he  indicates  will  reach  him.  If  it  does  not,  he  is 
bound,  provided  the  offeree  has  done  as  he  instructed 
him.  We  can  thus  lay  down  the  general  proposition 
that  whenever  the  acceptance  has  been  sent  in  the  man- 
ner indicated  by  the  offeror,  it  is  considered  to  have 
been  communicated,  and  the  contract  is  closed.  To 
this  it  may  be  added  that  where  nothing  is  said  about 
the  manner  of  communication,  it  is  understood  that  one 
of  the  common  means  is  to  be  employed,  e.g.  the  mail, 
telegraph,  etc.  This  is  the  general  rule,  although  it 
may  be  well  to  remember,  especially  if  you  live  in 
Massachusetts,  that  the  rule  in  that  state  is  the  other 
way. 


OFFER  AND  ACCEPTANCE  37 

13.  Letter  of  Acceptance  may  be  Revoked  by  Offeree.  — 
One  more  situation  may  be  referred  to  at  this  point 
with  regard  to  the  respective  liability  of  the  offeror 
and  the  offeree.  When  the  offeree  mails  his  letter  of 
acceptance,  we  have  said  that  the  contract  is  complete. 
That  is  true;  but  suppose  the  offeree  telegraphs  a 
rejection  of  the  offer,  which  rejection  actually  reaches 
the  offeror  before  the  letter  of  acceptance  comes  to  him. 
Would  there  be  a  contract?  There  would  not  be.  It 
may  be  asked  what  about  the  rule  that  the  mailing 
of  the  letter  of  acceptance  closes  the  contract?  The 
answer  is,  that  the  mailing  of  the  letter  closes  the  con- 
tract so  as  to  bind  the  offeror,  but  the  offeree  is  not 
bound  until  the  letter  of  acceptance  actually  comes  to 
the  knowledge  of  the  offeror. 

14.  The  Offer  may  be  Withdrawn  at  any  Time  Before 
Acceptance.  —  The  next  question  which  we  will  discuss 
is  whether  any  rights  are  conferred  upon  the  offeree  by 
the  making  of  the  offer,  but  before  it  has  been  accepted. 
Suppose  I  offer  to  sell  you  my  horse  for  one  hundred 
dollars ;  you  ask  for  half  an  hour  to  think  the  matter 
over.  At  the  end  of  that  time  you  decide  to  buy  the 
horse,  and  return  to  accept  my  offer.  In  the  meantime 
another  man  has  offered  me  one  hundred  and  twenty- 
five  dollars.  As  soon  as  you  come  in,  and  before  you 
have  a  chance  to  accept  the  offer,  I  say,  "  I  have  changed 
my  mind ;  I  will  not  sell  you  my  horse  for  one  hundred 
dollars ;  I  withdraw  my  off er. "  You  reply:  "You  have 
offered  him  to  me  for  one  hundred  dollars,  and  I  accept. 
Here  is  your  money. "  Would  there  be  a  contract  ?  That 
would  depend  upon  whether  the  fact  that  I  made  you  an 
offer  would  give  you  any  legal  right  over  me.  Is  there 
any  obligation   resting  upon   either  party  merely  by 


38  CONTRACTS 

virtue  of  the  fact  that  one  has  made  the  other  an  offer? 
In  this  case  there  would  not  be  a  contract.  An  offer 
may  be  revoked  at  any  time  before  acceptance.  If  you 
revoke  an  instant  before  acceptance,  you  are  safe. 

But  suppose,  in  the  previous  illustration,  B  goes  off 
and  does  not  return  within  the  half  hour,  but  stays 
away  two  or  three  hours,  then  returns  and  accepts  before 
you  have  a  chance  to  revoke.  Would  that  be  a  con- 
tract? It  would  not  be.  If  a  definite  time  is  stated  in 
which  the  offer  must  be  accepted,  and  it  is  not  accepted 
within  that  time,  it  is  said  to  lapse  without  any  revo- 
cation on  the  part  of  the  offeror.  If  the  offer  is  made 
and  no  time  is  stated  in  which  the  acceptance  must  be 
made,  it  will  lapse  after  a  reasonable  time  has  expired, 
and  an  acceptance  thereafter  will  have  no  effect.  An 
offer  may  also  lapse  by  the  death  of  either  party  at  any 
time  before  acceptance.  So  we  see  that  there  are  three 
ways  in  which  an  offer  may  be  withdrawn  before  accept- 
ance :  by  revocation  on  the  part  of  the  offeror,  or  by 
the  lapse  of  the  offer  through  the  expiration  of  a  reason- 
able time  or  the  time  limited,  or  by  the  death  of  either 
party. 

15.  Revocation  Not  Operative  until  it  comes  to  the  Actual 
Knowledge  of  the  Offeree.  —  We  have  seen  that  the  mail- 
ing of  a  letter  of  acceptance  closes  a  contract,  and  that 
it  is  not  necessary  for  the  letter  of  acceptance  actually 
to  reach  the  offeror.  We  now  come  to  the  question, 
When  does  the  revocation  of  an  offer  become  operative? 
Does  it  become  operative  at  the  moment  the  letter 
of  revocation  is  mailed,  or  when  the  letter  actually 
reaches  the  offeree.  A,  in  Liverpool,  wrote  to  B,  in 
New  York,  making  him  an  offer.  B  at  once  mailed  a 
letter  of  acceptance.     While  the  letter  was  still  on  the 


OFFER  AND  ACCEPTANCE  39 

way  over,  A  cabled  a  withdrawal  of  the  offer.  Is  there 
a  contract?  Clearly,  yes,  if  we  apply  the  principles  we 
have  learned.  B's  mailing  of  the  acceptance  closed  the 
contract  before  the  revocation  was  sent. 

Now  suppose  A  writes  to  B  on  November  3  making 
him  an  offer,  and  the  next  day,  November  4,  repents  of 
his  action  and  mails  a  letter  of  revocation.  B  receives 
the  offer  on  November  10,  and  mails  his  letter  of 
acceptance  on  the  same  day,  seven  days  after  A  had,  by 
letter,  revoked  the  offer.  The  next  day,  the  11th,  B 
receives  A's  letter  of  revocation.  That  state  of  facts 
brings  up  the  question  whether  A's  letter  of  revocation 
became  operative  the  moment  he  mailed  it?  If  so,  then 
clearly  there  was  no  contract,  because  the  letter  of  revo- 
cation was  mailed  on  the  3rd,  long  prior  to  the  acceptance. 
On  the  other  hand,  B's  letter  of  acceptance  was  mailed 
before  he  knew  of  the  revocation,  and  we  ask,  naturally, 
What  about  the  rule  that  the  mailing  of  the  letter  of 
acceptance  closes  the  contract?  If  both  are  to  be  opera- 
tive on  the  day  of  mailing,  we  are  bound  to  have  a  con- 
flict. The  rule  is,  that  the  revocation  is  not  operative 
until  it  has  come  to  the  knowledge  of  the  offeree.  So 
we  see  again  that  the  offeree  seems  to  have  all  the 
better  of  it,  and,  in  a  sense,  this  is  just  because  he 
does  not  do  the  acting.  The  offeror  is,  as  a  rule,  the 
one  who  is  seeking  the  contract  and,  therefore,  he 
assumes  the  risk. 

16.  Offer  may  be  Revoked  by  Conduct.  —  Just  as  a 
contract  may  be  accepted  without  any  express  words  of 
acceptance,  but  by  conduct  merely,  so  an  offer  may  be 
revoked  in  the  same  manner.  If  you  offer  to  sell  me 
certain  property,  and  before  I  accept  you  sell  to  some 
one  else,  and  I  am  informed  of  that  fact  by  you,  the 


40  CONTRACTS 

offer  is  revoked  just  as  much  as  if  you  had  definitely 
said  to  me,  "I  withdraw  my  offer."  In  such  cases, 
however,  the  notification  of  the  action  which  results  in 
the  revocation  of  the  offer  must  be  sent  to  the  offeree, 
or  else  he  is  entitled  to  treat  the  offer  as  still  remaining 
open.  Suppose  I  offer  to  sell  you  my  house  for  twenty 
thousand  dollars  and  promise  to  hold  the  offer  open 
until  to-morrow  at  4  p.m.  At  noon  to-morrow  X  comes 
and  offers  me  thirty  thousand  dollars,  and  I  close  with 
him  at  once.  At  3  p.m.  you  accept  my  offer.  Assum- 
ing that  I  have  not  notified  you  of  the  sale  to  X,  it 
seems  clear  enough,  on  the  principles  we  have  just  been 
discussing,  that  I  will  be  held  responsible;  and  yet, 
strange  to  say,  one  or  two  leading  cases  were  decided 
the  other  way  not  so  very  long  ago.  The  law,  hoAvever, 
is  now  settled  more  in  accordance  with  the  general  prin- 
ciple, that  in  such  a  case  I  would  be  liable  because  I  did 
not  communicate  my  revocation  of  the  offer  to  you.  It 
would  seem,  at  first  thought,  that  I  would  be  bound  to 
keep  my  offer  open  until  4  p.m.,  according  to  my  prom- 
ise, or  I  would  be  liable  in  damages  for  failing  to  keep 
my  agreement  to  hold  the  offer  open  until  that  time. 
This  would  not  be  true  in  the  illustration  we  were 
considering,  because  I  received  no  consideration  for  the 
promise  to  hold  the  offer  open.  It  was  a  mere  gratui- 
tous promise  and,  as  we  will  learn  in  the  next  chapter, 
not  binding  upon  me.  I  was  perfectly  at  liberty  to 
revoke  at  any  time,  provided  I  informed  you  of  the 
fact. 

17.  Knowledge  of  the  Revocation  should  come  from  the 
Offeror.  — In  cases  where  the  offeror  has  not  distinctly 
stated  that  he  withdraws  his  offer,  but  has  done  so  by 
his  conduct,  the  question  sometimes  arises  whether  it 


OFFER   AND   ACCEPTANCE  41 

is  necessary  that  the  offeree  should  have  been  informed 
of  the  withdrawal  of  the  offer  by  the  offeror  himself,  or 
whether  it  would  not  be  a  sufficient  notification  if  some 
third  party  had  actually  informed  him  of  the  fact. 

You  remember  in  the  above  illustration,  that  I 
offered  to  sell  you  a  house,  promising  to  hold  my  offer 
open  until  4  p.m.  the  next  day,  but  had  sold  at  noon 
to  X.  Assume  that  you  hear  of  the  sale  at  2  p.m.  by  a 
roundabout  way,  and  come  to  me  and  accept  at  once  in 
order  that  you  may  have  a  claim  against  me  for  breach 
of  contract,  as  you  know  that  I  cannot  now  fulfil  it. 
At  first  glance,  one  would  say  there  is  no  contract ;  but 
on  second  thought,  you  can  see  into  what  embarrassment 
such  a  conclusion  would  lead  us.  One  would  be  obliged 
to  act,  perhaps  to  his  own  damage,  upon  no  better 
information  than  mere  rumor;  it  seems  that  a  knowl- 
edge of  the  revocation  of  the  offer  must  come  directly 
from  the  offeror  to  be  effective.  It  is  probable  that 
in  the  illustration  just  given  there  would  be  a  contract. 


CHAPTER  IV 

FORM  AND  CONSIDERATION 

1.  Necessity  for  Seal  or  Consideration ;  Classification  of 
Contracts.  —  We  have  now  brought  the  two  parties 
together,  and  they  have  come  to  a  definite  expression 
of  agreement ;  yet  something  more  is  required  before 
this  agreement  becomes  a  contract  enforceable  at  the 
law.  When  we  remember  that  the  relation  which 
is  established  between  two  persons  when  they  enter 
into  a  contract  confers  rights  and  liabilities  upon  each 
of  them,  we  can  understand  why  the  law  requires  some- 
thing more  than  a  mere  expression  of  agreement  before 
it  will  fasten  upon  them  these  rights  and  liabilities. 
In  order  that  the  agreement  may  become  a  binding 
contract,  something  of  value,  called  a  "consideration," 
must  have  passed  between  the  parties,  as  compensation 
for  the  promises  contained  in  the  contract,  or  else  the 
agreement  must  have  been  expressed  in  a  particular 
form,  called  a  "contract  under  seal." 

If  either  of  these  two  requisites  has  been  complied 
with,  then  the  agreement,  which  before  was  of  no 
validity  whatever,  will  create  a  binding  contract.  If 
the  agreement  be  expressed  by  a  sealed  writing,  it  there- 
by becomes  an  enforceable  contract,  but  it  is  absolutely 
necessary  for  all  those  contracts  which  are  not  under 
seal  to  be  supported  by  a  consideration.  Consideration, 
as  we  shall  explain  more  fully  hereafter,  consists  of  any 

42 


FORM  AND  CONSIDERATION  48 

legal  benefit  conferred  upon  one  party  by  the  other,  on 
account  of  the  contract  into  which  he  has  entered,  or  of 
any  injury  suffered  by  the  first  party,  on  account  of  the 
promise  which  he  has  made.  In  view  of  what  we 
have  said,  contracts  naturally  fall  into  two  divisions. 
Formal  contracts,  which  depend  for  their  validity  upon 
the  form  in  which  they  are  expressed,  and  simple  con- 
tracts, which  to  be  valid  require  the  presence  of  con- 
sideration. 

2.  Formal  Contracts ;  Contracts  of  Record.  —  There  are 
two  kinds  of  formal  contracts  which  are  valid  without 
consideration.  These  two  kinds  are  "contracts  of 
record"  and  "contracts  under  seal."  Contracts  of 
record,  so  called,  are  really  not  contracts  at  all,  and, 
strictly  speaking,  the  name  should  not  be  applied  to 
them.  If  I  sue  you  in  the  courts,  and  judgment  for 
ten  thousand  dollars  is  rendered  in  my  favor,  you 
owe  me  ten  thousand  dollars — not  by  virtue  of  any 
present  contract,  for  none  has  been  entered  into,  but 
merely  by  virtue  of  the  fact  that  the  court  has  adjudged 
in  my  favor.  The  record  of  this  judgment,  properly 
made  out  by  the  court  officials,  is  known  as  a  contract 
of  record.  It  is  enforceable  by  the  court's  order,  and 
requires  none  of  the  usual  characteristics  of  a  contract  to 
render  it  valid.  Why  it  should  be  called  a  contract 
is  not  clear,  for  it  is  conceded  that  it  is  not  a  contract 
in  the  usual  sense.  There  has  been  no  meeting  of  the 
minds  of  the  two  parties.  On  the  contrary,  each  was 
fighting  the  other.  They  were  probably  as  far  from 
agreement  after  the  court's  decision  as  they  were  before. 

3.  Contracts  under  Seal ;  What  a  Seal  Is.  —  The  true 
formal  contract,  and  the  only  real  agreement  which  is 
enforceable  without  the  presence  of  consideration,  is  a 


44  CONTRACTS 

contract  under  seal.  A  contract  under  seal  is  one 
which  has  been  reduced  to  writing,  and  which  has 
been  signed  and  sealed  by  the  contracting  party  or 
parties.  The  one  peculiar  feature  of  it  is  that  it  must 
be  sealed.  When  we  speak  of  sealing  a  contract  in  this 
sense,  we  mean  that  the  party  who  signs  his  name  must 
place  after  his  signature  a  seal.  In  ancient  times  this 
seal  was  required  to  be  of  wax,  which  was  either  tied 
to  the  paper  with  ribbons  or  fastened  on  by  some  ad- 
hesive substance.  Such  seals  are  still  very  common, 
and  may  be  seen  on  papers  which  have  been  executed 
before  a  notary  public,  or  on  diplomas,  or  any  papers 
issued  by  universities  or  colleges  or  other  corporations. 

The  old  common-law  rule  prescribing  a  particular 
kind  of  seal  has  been  abolished  in  most  states  in  this 
country.  If  you  use  appropriate  words,  e.g., "witness 
my  hand  and  seal  this  23rd  day  of  November,  1899," 
and  after  signing  your  name  make  a  mark  of  almost  any 
kind  with  the  intention  for  it  to  represent  a  seal,  you 
have  sealed  the  paper  sufficiently.  In  the  state  of 
Pennsylvania,  a  pen  (mark  one-eighth  of  an  inch  long 
was  decided  by  the  court  to  be  a  sufficient  sealing,  when 
it  appeared  it  had  been  put  upon  the  paper  for  the  pur- 
pose of  representing  a  seal.  It  goes  without  saying 
that  if  the  pen  mark  had  been  a  mere  chance  stroke  or 
flourish,  it  could  not  have  constituted  a  seal.  The  rule 
of  interpretation  is  to  ascertain,  if  possible,  the  true 
intention  of  the  parties.  If  they  have  placed  appro- 
priate words  on  the  paper,  almost  any  legible  mark 
which  is  obviously  intended  to  represent  a  seal  is  suf- 
ficient in  a  majority  of  the  states,  though  in  a  few  the 
old  wax  seal  is  still  required. 

If   it  appear  that  the   original    intention    to    seal 


FORM  AND  CONSIDERATION  45 

the  paper  has  not  been  fully  carried  out,  then  the 
contract  is  treated  as  a  simple  one.  In  one  case  slits 
had  been  made  in  the  paper  for  the  insertion  of  the 
ribbon  with  which  to  fasten  the  seal,  but  no  seal  had 
been  affixed.  In  that  case  it  seems  clear  that  the 
parties  had  stopped  before  they  had  completed  the  seal- 
ing of  the  paper.  Accordingly,  it  was  decided  that 
the  contract  was  a  simple  one.  Upon  most  papers 
which  are  intended  to  be  sealed  a  sufficient  seal  is 
already  affixed,  so  that  all  the  parties  have  to  do  is  to 
sign  their  names.  On  such  papers  you  will  see  a  small 
round  figure  with  the  letters  L.  S.  (Locus  Sigilli  —  the 
place  of  the  seal)  stamped  in  its  centre.  This  figure 
is  generally  a  sufficient  seal. 

4.  The  Effect  of  Sealing  a  Contract.  —  Having  seen 
how  to  make  a  sealed  contract,  the  next  question  is, 
What  is  the  effect  of  thus  sealing  it  ?  As  has  been 
explained,  when  the  agreement  is  not  under  seal,  it 
is  necessary  for  some  valuable  consideration  to  have 
passed  between  the  parties,  or  the  contract  will  not  be 
binding.  But  when  a  man  seals  a  contract  which  he 
has  made,  it  is  not  necessary  that  there  shall  be  any 
consideration.  When  he  affixes  the  seal  he  is  supposed 
to  add  to  the  solemnity  of  his  action.  The  theory  is 
that  by  the  act  of  sealing  the  paper  he  indicates  that  he 
has  considered  his  action  well  and  enters  into  it  only 
after  due  deliberation  and  mature  reflection. 

It  may  be  thought  after  the  explanation  we  have  given 
of  what  constitutes  a  seal,  that  there  is  really  little  ad- 
ditional solemnity  in  the  act  "of  sealing  an  instrument. 
This  is  true,  but  the  legal  effect  of  the  seal  remains, 
although  the  formality  formerly  observed  has  been  dis- 
pensed with.     In  earlier  times  a  man's  seal  was  more 


46  CONTRACTS 

distinctly  his  own  than  his  signature;  in  fact,  papers 
were  sometimes  not  signed  at  all,  but  simply  sealed  with 
the  seal  of  the  party  who  was  being  bound.  All  of  the 
edicts  published  by  the  king  were  sealed  with  the  king's 
seal,  and  the  keeper  of  that  seal  was  a  functionary  of  the 
greatest  possible  importance.  To  question  the  intention 
of  agreements  thus  deliberately  expressed  was  not  to  be 
thought  of.  In  these  days  of  practical  simplicity  these 
formalities  have  been  gradually  abandoned,  but  owing 
to  the  rigidity  of  the  common-law  rules  the  legal  effect 
of  the  sealed  instrument  is  still  retained.  Some  authors 
explain  the  fact  that  a  contract  under  seal  is  valid  with- 
out consideration  by  saying  that  the  seal  itself  gives 
validity  to  the  contract;  others  say  the  seal  raises  a 
presumption  that  a  consideration  had  been  given  by  one 
party  to  the  other,  the  court  refusing  to  admit  any  evi- 
dence tending  to  contradict  this  presumption.  The 
result,  for  our  purposes,  is  about  the  same.  A  gratui- 
tous promise  can  be  enforced  if  made  under  seal. 

5.  Merger.  —  A  contract  under  seal  is,  therefore,  of 
a  higher  or  more  solemn  order  than  a  simple  contract. 
Suppose  A  and  B  make  a  simple  contract  by  which  A 
agrees  to  sell  B  a  house  for  so  much  money  and  at  a 
certain  time;  at  a  later  date,  the  same  parties  enter 
into  an  agreement  to  do  the  same  thing,  and  exe- 
cute this  agreement  under  seal.  In  such  a  case  the 
simple  contract  disappears,  and  we  have  left  only  the 
sealed  contract.  This  phenomenon  is  known  as 
"merger."  The  lesser  is  said  to  merge  into  the 
greater. 

6.  What  Contracts  must  be  made  Under  Seal ;  the  Deed ; 
Delivery  in  Escrow.  —  There  are  some  kinds  of  instru- 
ments and  contracts  which  are  valid  only  if  made  under 


FORM  AND  CONSIDERATION  47 

seal.  One  of  the  most  common  of  such  instruments  is 
the  deed.  A  deed  is  an  instrument  the  terms  of 
which  are  written  on  paper  or  parchment,  signed  by 
the  parties,  sealed,  and  delivered  to  the  person  or  per- 
sons upon  whom  it  confers  rights.  The  kind  of  deed 
which  is  perhaps  most  familiar  is  the  deed  for  the  con- 
veyance of  land.  All  of  the  elements  just  mentioned 
are  necessary  in  order  to  give  it  validity.  Not  only 
must  it  be  signed  and  sealed,  but  it  must  also  be  deliv- 
ered before  any  rights  are  conferred  by  it. 

A,  a  man  advanced  in  years,  who  desired  to  give  his 
nephew  B  a  farm  upon  the  event  of  his  marrying  C, 
made  out  the  deed  and  deposited  it  with  X,  his  attorney, 
directing  him  to  deliver  it  to  B  upon  the  day  when  he 
married  C.  This  instrument  conferred  no  rights  upon 
B  prior  to  the  date  of  its  delivery  to  him.  In  the  mean- 
time it  is  said  to  be  in  escrow,  the  term  always  used  to 
describe  a  deed  deposited  with  one  person  for  future 
delivery  to  another.  In  the  case  we  are  discussing,  A 
could  have  made  out  a  second  deed  to  some  other  party, 
and  if  he  had  delivered  it  prior  to  the  date  when  the 
first  deed  was  actually  given  to  B,  the  latter  would  get 
nothing.  The  second  deed  would  have  been  fully 
executed  before  the  first  one,  for  the  reason  that  it  was 
delivered  first. 

7.  Bond  and  "Warrant  of  Attorney.  —  As  has  already 
been  indicated,  a  gratuitous  promise  is  binding  only  if 
made  under  seal.  Accordingly,  a  promise  of  this  nature 
must  be  so  expressed.  An  example  of  a  gratuitous 
promise  is  the  bond.  A  bond  is  a  sealed  instrument, 
containing  a  promise  on  the  part  of  the  individual  who 
executes  it,  to  pay  money.  This  promise  to  pay  may 
be  conditional  or  unconditional.      The  most  common 


48  CONTRACTS 

bonds  are  those  executed  for  the  faithful  performance 
of  one's  duties  (as  in  the  case  of  an  officer  who  is 
required  to  handle  money)  or  bonds  providing  for  the 
payment  of  money  which  the  promisor  owes,  with  a 
penalty  for  non-payment  at  maturity.  An  example  of 
the  first  would  be  a  case  where  a  man  is  appointed 
treasurer  of  a  corporation.  He  would  be  required  to 
file  a  bond,  in  which  he  agrees  to  pay  to  the  corpora- 
tion a  large  sum  of  money,  usually  fixed  at  double  the 
amount  he  is  to  handle.  The  bond,  however,  contains 
a  provision  that  if  he  faithfully  performs  the  duties  of 
his  office  then  the  obligation  is  to  become  void. 

To  illustrate  the  second  kind  of  bond,  suppose  you 
owe  me  five  hundred  dollars  which  you  are  to  pay  me 
before  January  1,  1901.  You  might  file  a  bond  with 
me,  by  which  you  obligate  yourself  to  pay  me  one  thou- 
sand dollars  on  January  1,  1901,  but  with  a  proviso  that 
if  before  that  day  you  have  paid  your  debt,  then  the  bond 
is  to  be  void.  There  is  usually  attached  to  such  a 
bond  a  paper  called  a  warrant  of  attorney,  by  which  the 
party  signing  the  bond  authorizes  the  other  to  enter 
judgment  in  the  court  against  him  for  the  full  amount 
as  soon  as  he  fails  to  perform  his  obligations,  without 
the  formality  of  a  suit.  This  act  of  entering  judgment 
creates  a  debt  of  record,  and  gives  the  party  in  whose 
favor  the  judgment  is  rendered  the  privilege  of  taking 
the  other's  property  for  the  payment  of  his  debt. 

Formerly,  if  you  became  liable  on  your  bond,  you 
would  be  compelled  to  pay  its  full  amount  even  though 
it  were  double  your  real  debt;  but  nowadays  you  are 
required  only  to  pay  the  actual  debt  together  with  any 
loss  the  other  party  may  have  sustained  by  virtue  of  your 
delay.     The  purpose  of  giving  a  bond,  you  see,  is  to 


FORM  AND  CONSIDERATION  49 

guarantee  the  opposite  party  from  loss,  and  the  warrant 
of  attorney  is  for  the  purpose  of  placing  in  his  hands 
a  means  of  prompt  redress.  These  instruments  give 
him  much  power  over  you.  One  should  always  think 
twice  before  giving  a  bond  and  warrant  of  attorney. 

In  addition  to  these  there  are  a  great  many  contracts 
which  are  usually  sealed.  It  is  always  done  when 
the  parties  wish  to  add  unusual  definiteness  and  pre- 
cision to  the  obligation,  or  where  they  are  in  doubt 
about  the  presence  of  consideration. 

8.  Simple  Contracts;  Consideration  Necessary.  — Before 
taking  up  the  discussion  of  what  consideration,  in 
fact,  is,  let  it  be  emphasized  that  no  simple  contract 
is  valid  unless  there  be  a  consideration  for  the  promise. 
Just  why  this  is  true  it  is  hard  to  say.  Nobody 
can  answer  that  question  with  any  degree  of  confidence. 
The  law  says  the  contract  is  worthless  unless  there 
is  a  consideration.  Some  writers  think  this  rule 
is  to  prevent  unjust  bargains  from  being  enforced  in 
the  courts.  Others  say  the  law  will  enforce  any  legal 
agreement  if  it  is  satisfied  the  parties  are  really  agreed, 
and  it  demands  the  presence  of  consideration  to  sat- 
isfy it  that  the  parties  were  in  earnest  when  they  made 
their  bargain.  Whatever  the  reason  may  be,  a  contract 
not  under  seal  requires  a  consideration  to  make  it 
enforceable.    . 

9.  Consideration  mnst  Come  from  the  Promisee.  —  Con- 
sideration is  said  to  be  "  any  benefit  to  the  promisor  or 
any  detriment  to  the  promisee."  The  promisor  is  the 
one  who  makes  the  promise,  the  promisee  is  the  one  to 
whom  the  promise  is  made.  To  constitute  a  legal  con- 
sideration the  benefit  must  come  from  the  promisee.  I 
might  promise  to  make  you  a  present  of  one  hundred 


50  CONTRACTS 

dollars,  and  X  might  be  so  moved  by  my  generosity 
as  to  give  me  a  farm.  That  would  no  doubt  be  a 
benefit,  but  it  certainly  would  not  be  a  consideration, 
and  would  give  you  no  right  to  sue  me  on  my  promise. 
Or  suppose  I  promise  you  to  give  X  one  hundred  dol- 
lars if  you  promise  to  help  X  through  college.  That 
gives  X  no  right  to  sue  me,  because  the  consideration 
did  not  come  from  him,  but  from  you. 

10.  Legal  Meaning  of  Consideration.  —  The  exact 
meaning  of  the  word  "  consideration  "  is  very  hard  to 
define.  It  is  easy  to  say  that  any  benefit  at  all  accruing 
to  the  promisor  is  a  consideration,  and  likewise  any  det- 
riment or  injury  accruing  to  the  promisee.  But  these 
words  mean  a  great  deal,  and  the  question  as  to  what  is 
a  legal  benefit  or  a  legal  detriment  is  often  extremely 
difficult  to  determine.  It  is  scarcely  possible  in  a  brief 
treatment  of  the  subject  to  explain  the  full  significance 
of  what  the  law  means  by  "consideration,"  but  we  may 
at  least  point  out  some  of  the  things  which  determine 
its  presence  or  absence.  The  consideration  may  consist 
either  of  a  present  act,  such  as  the  payment  of  money, 
or  a  promise  to  do  an  act  in  the  future,  e.g.,  you  promise 
to  marry  X ;  X  promises  to  marry  you ;  neither  of  you 
has  done  an  act,  and  yet  there  is  a  contract  —  a  promise 
is  in  itself  a  detriment  in  the  eye  of  the  law,  because 
you  thereby  assume  a  legal  responsibility.  If  the  con- 
sideration be  a  present  act,  as  money  paid,  it  is  said  to 
be  "executed,"  if  it  is  a  promise  to  do  a  future  act,  it  is 
"executory." 

11.  Consideration  need  not  be  Adequate  to  the  Benefit 
Received.  — At  the  beginning  of  the  discussion  of  con- 
sideration we  are  met  with  the  query,  How  much  consid- 
eration is  necessary  to  make  a  contract  valid  ?     Must  it 


FORM  AND   CONSIDERATION  51 

be  adequate  to  the  benefit  received?  If  I  agree  to  give 
you  a  farm  worth  thirty  thousand  dollars  in  considera- 
tion of  your  giving  me  one  cent,  there  is  a  considera- 
tion, Would  there  be  a  contract?  It  seems  absurd  to 
call  one  cent  a  consideration  for  a  farm,  and  yet  we  are 
strictly  within  the  terms  of  our  definition.  We  have 
a  benefit  to  the  promisor.  The  cent  would  be  a  legal 
consideration.  The  important  question  is  not  as  to  the 
amount  given,  but  whether  any  real  value  is  given.  If 
there  has  been  any  legal  benefit  to  one  party,  however 
small,  or  any  legal  harm  to  the  other,  however  insignifi- 
cant, we  have  a  consideration. 

B,  for  some  reason  not  explained,  wanted  to  weigh 
two  large  boilers  which  A  owned.  A  told  him  he  might 
do  it  if  he  would  promise  to  return  them  in  the  same 
condition  in  which  they  were  when  he  got  them,  to 
which  B  agreed.  He  took  them  all  apart  and,  after 
weighing  them,  returned  them  to  A  without  putting 
them  together  again.  A  sued  B  for  breach  of  his  con- 
tract to  return  the  boilers  in  good  condition.  B  said 
there  was  no  consideration  for  his  promise.  He  de- 
clared it  was  no  benefit  to  him  to  weigh  the  boilers,  and 
neither  was  it  a  detriment  to  A.  The  judges  decided 
that  it  must  have  been  some  benefit  to  him  or  he  would 
not  have  taken  the  trouble  to  weigh  them.  At  any 
rate,  they  said,  it  was  a  detriment  to  A  to  part  with 
possession  of  the  boilers  even  for  a  moment.  B  might 
have  made  a  very  bad  bargain.  The  cost  of  putting 
the  boilers  together  might  be  very  much  more  than  the 
benefit  he  acquired  from  being  allowed  to  weigh  them, 
but  that  was  his  business.  He  had  made  his  bed  and 
must  lie  on  it.  The  law  will  not  come  to  the  rescue 
of  a  man  on  the  plea  that  he  has  made  a  bad  bargain. 


52  CONTRACTS 

Suppose  you  hold  a  patent  which  purports  to  give 
you  the  exclusive  right  to  manufacture  and  sell  auto- 
mobiles in  the  United  States,  and  I  agree  to  buy  all  the 
right,  title,  and  interest  which  you  have  in  that  inven- 
tion, together  with  all  documents,  patents,  etc.  For 
this  I  pay  you  a  large  sum  of  money.  After  I  get  the 
papers  I  find  out  that  somebody  else  holds  prior  patents, 
and  my  papers  are  worthless.  Notice  just  what  I  was 
buying.  I  was  buying  all  the  right  which  you  had. 
Your  rights  have  turned  out  to  be  very  little  or  noth- 
ing, and  yet  as  I  got  what  I  bargained  for,  i.e.,  your 
right,  I  cannot  escape  from  my  bargain.  I  should  have 
looked  up  the  former  patents  before  I  bought.  It  is  a 
safe  rule  always  to  think  about  a  bargain  before  you  close 
it.  The  law  will  not  help  you  if  you  get  any  considera- 
tion at  all.  While  in  such  cases  as  this  the  rule  may 
seem  a  hardship  to  one  party,  a  moment's  reflection  will 
show  that  a  different  rule  would  involve  us  in  endless 
difficulty.  It  would  be  impossible  to  tell  when  the 
consideration  is  adequate.  Some  people  might  think  it 
adequate,  others  might  think  it  entirely  inadequate. 
The  law  avoids  this  difficulty  by  refusing  to  consider 
that  question.  The  only  problem  is  whether  any  real 
value  has  changed  hands. 

12.  What  Constitutes  a  Legal  Benefit.  —  The  words 
"benefit"  and  "detriment,"  as  they  are  used  in  this 
connection,  must  be  understood  to  mean  legal  benefit 
and  legal  detriment.  It  is  quite  possible  that  the 
gratification  of  some  desire  of  yours  may  benefit  you 
personally,  when  the  law  would  not  deem  it  to  be  a 
consideration.  A's  father,  just  before  his  death,  ex- 
pressed a  desire  that  a  farm  which  by  his  will  went 
to  A,  should  be  given  to  A's  brother,  B.     A,  desiring 


FORM  AND   CONSIDERATION  53 

to  carry  out  his  father's  wishes,  promised  to  convey  to 
B.  He  afterward  refused  to  carry  out  the  agreement. 
When  B  sued  him,  he  set  up  "no  consideration"  as  a 
defence.  The  first  question  is,  Would  the  gratification 
of  A's  desire  to  carry  out  his  father's  wishes  (which  he 
undoubtedly  had  at  the  time  he  made  the  promise)  be 
a  benefit  to  him?  Remembering  that  we  are  consider- 
ing A's  feelings  at  the  time  he  promised,  we  would 
unhesitatingly  answer,  Yes.  But  would  there  be  a  con- 
sideration? No,  because  the  fulfilment  of  that  wish 
of  A's  is  not  a  thing  of  value  such  as  the  law  can 
take  cognizance  of.  Only  a  benefit  that  admits  of  some 
reasonably  definite  valuation  can  constitute  a  consid- 
eration. In  another  case  A  was  continually  complain- 
ing to  his  father  that  he  had  not  received  as  many 
advantages  as  his  brothers.  His  father  promised  to 
release  him  from  a  debt  of  one  hundred  dollars  if  he 
would  quit  complaining.  A  presumably  quit  complain- 
ing, for  after  the  death  of  his  father  he  claimed  to  have 
been  released  from  the  debt.  The  court  said  this  con- 
sideration was  of  too  vague  and  uncertain  a  character 
to  be  noticed  by  a  court  of  law. 

13.  What  Constitutes  a  Legal  Detriment.  —  We  have 
seen  that  if  the  consideration  consists  of  a  benefit,  it 
must  be  a  benefit  of  some  actual  value  to  him  who 
makes  the  promise.  If  it  consists  of  a  detriment  which 
the  party  to  whom  the  promise  is  made  has  suffered  on 
account  of  the  promise,  this  detriment  must  involve 
some  actual  loss  to  the  promisee.  If  he  has  under- 
taken new  responsibilities  this  is  a  legal  detriment, 
and  therefore  a  good  consideration. 

In  the  illustration  where  A  promised  to  convey  a  farm 
to  B  because  his  father  wished  him  to  do  so,  if  B,  in 


64  CONTRACTS 

consideration  of  A's  promise,  had  agreed  to  pay  a  certain 
sum  annually  as  rental,  that  promise  would  constitute 
a  good  consideration  because  it  was  clearly  a  detriment 
to  the  promisee,  B,  and  was  a  detriment  of  actual, 
appreciable  value. 

If  the  promisee  surrenders  any  legal  right,  even  for 
a  short  time,  he  has  suffered  a  loss  sufficient  to  consti- 
tute a  consideration.  A,  who  was  somewhat  dissipated, 
was  promised  one  thousand  dollars  by  his  grandfather, 
to  be  paid  him  on  his  twenty-first  birthday,  if,  during 
the  time  previous  to  that  day,  he  would  not  use  liquor 
or  tobacco.  A  promised  and  kept  his  word.  He  had 
definitely  surrendered  a  right.  Although  its  exercise 
would,  in  fact,  have  been  detrimental  to  him,  the  court 
said,  legally  speaking,  he  had  given  up  a  privilege,  or 
a  benefit,  and  the  contract  was  good.  In  the  same 
way,  if  you  refrain,  for  ever  so  short  a  time,  from  prose- 
cuting your  claims  in  the  courts,  you  have  thereby 
suffered  a  detriment.  A  was  about  to  sue  X.  B  asked 
him  not  to  do  so,  and,  in  consideration  of  his  promise 
to  forbear  suing,  promised  to  pay  him  one  hundred 
dollars.  A  forbore  from  suing,  and  then  B  refused  to 
pay  him  the  one  hundred  dollars.  When  A  sued,  B 
set  up  the  defence  of  no  consideration.  A  had  given 
up  his  right  to  sue  X  at  once.  Giving  up  that  right 
was  a  detriment  to  him,  and  therefore  constituted  a 
good  consideration,  and  B  had  to  pay. 

14.  An  Agreement  to  do  an  Impossible  Thing  is  no  Con- 
sideration. —  We  have  seen  that  a  consideration  may 
consist  of  a  promise  to  do  an  act.  But  if  the  act  is 
impossible  of  performance,  the  promise  is  a  nullity. 
Suppose  I  agree  to  give  you  one  hundred  dollars,  in 
consideration   of    which  you   agree   to   drink  up    all 


FORM  AND  CONSIDERATION  55 

the  water  in  the  sea.  There  would  be  no  contract, 
because  the  performance  of  the  promise  is  mani- 
festly impossible,  and,  hence,  the  promisor  was  under 
no  liability  at  all.  He  therefore  never  suffered  any 
real  detriment.  It  should,  however,  be  noted  that 
the  impossibility  contemplated  by  the  law  is  physical, 
and  not  the  mere  pecuniary  inability  of  the  party  to 
fulfil  his  agreement. 

15.  It  is  no  Consideration  for  a  Man  to  do  that  Which 
he  is  already  Legally  Bound  to  do. — In  considering 
whether  a  real  benefit  has  been  conferred  or  a  real 
detriment  suffered,  we  must  also  take  inter  account  the 
existing  liabilities  of  the  parties.  If  one  is  already 
bound  by  contract  to  do  some  act,  it  is  no  legal  benefit 
to  another  for  him  to  perform  that  obligation,  if  the 
latter  is,  in  any  event,  entitled  to  the  performance. 
Suppose  I  owe  you  one  hundred  dollars,  which  for  a 
long  time  I  refuse  to  pay.  At  last  I  tell  you  I  will 
pay  you  the  full  amount  if  you  will  promise  to  lend  me 
your  horse  for  a  month.  I  pay  over  the  money,  and 
you  refuse  to  let  me  have  the  horse.  I  sue,  and  you 
plead  no  consideration.  Is  it  not  a  benefit  to  you  for 
me  to  pay  you  the  hundred  dollars?  No  doubt  this 
is  correct  in  one  sense,  but  as  the  hundred  dollars 
really  belonged  to  you  before  being  paid  over,  are  you 
legally  benefited  by  receiving  that  which  is  your  own? 
And  as  I  owe  the  amount  to  you,  am  I  legally  harmed 
by  paying  that  which  does  no  more  than  fulfil  my  legal 
obligation?  The  answer  to  both  inquiries  is  clear. 
A  man  cannot  be  said  to  be  benefited  by  receiving 
that  which  is  his  own,  or  harmed  by  delivering  over  to 
another  that  which  belongs  to  him. 

Furthermore,  if  a  man  has  contracted  to  do  a  certain 


56  CONTRACTS 

act,  he  cannot  make  the  performance  of  it  the  considera- 
tion for  a  new  promise.  A  hired  a  crew  to  go  on  a 
voyage  from  London  to  the  Baltic  Sea  and  back.  Two 
of  his  crew  deserted.  He  offered  to  divide  the  wages 
of  the  two  deserters  among  the  remaining  sailors  if  they 
would  sail  the  ship  home.  They  accepted  the  offer. 
After  they  had  returned,  he  refused  to  pay  them,  claim- 
ing there  was  no  consideration  for  his  promise.  The 
court  decided  there  was  no  binding  contract  because 
the  seamen  did  no  more  than  they  had  contracted  to  do 
in  the  first  place,  i.e.  stay  with  the  ship  and  sail  her 
until  she  returned  to  the  home  port. 

On  the  same  principle  it  is  no  consideration  for  a 
man  to  perform  some  duty  which  the  law  imposes  upon 
him,  even  though  he  may  not  have  made  a  contract  to 
perform  it.  Suppose  I  am  interested  in  the  prosecu- 
tion of  a  criminal.  You  are  summoned  by  the  court 
as  a  witness.  I  promise  you  that  if  you  will  come,  I 
will  pay  you  for  the  time  you  lose  from  your  business. 
Can  you  enforce  that  promise  on  my  part?  You  can- 
not, because  you  were  bound  to  come  and  testify  any- 
way, and  therefore  your  agreement  to  do  so  was  no 
consideration  for  my  promise  to  pay.  If,  however, 
the  person  so  bound  performs  duties  other  than  those 
which  he  is  by  law  compelled  to  perform,  then  he  has 
given  a  consideration.  A  policeman  who  had  performed 
extraordinary  duties  while  assisting  in  the  capture  of 
a  criminal  for  whose  arrest  a  reward  had  been  offered, 
claimed  the  reward.  It  was  contended  that  he  had  done 
no  more  than  the  law  required  him  to  do,  and  was  there- 
fore not  entitled  to  receive  it ;  but  the  court  said  he  was, 
inasmuch  as  he  had  performed  services  over  and  above 
his  regular  duties. 


FORM  AND  CONSIDERATION  57 

16.  It  is  no  Consideration  for  a  Man  to  Refrain  from 
doing  What  he  is  by  law  Forbidden  to  do.  —  Not  only  is  it 
no  legal  benefit  for  a  man  to  perform  his  obligation; 
it  is  also  no  legal  harm  for  him  to  refrain  from  doing 
something  which  he  is  forbidden  to  do  by  law.  A 
declared  his  intention  of  assaulting  X.  B  offered  him 
ten  dollars  if  he  would  relinquish  that  intention.  He 
accepted  the  offer.  There  was  clearly  no  consideration 
there,  for  A  relinquished  no  right.  He  merely  promised 
not  to  do  what  by  law  he  was  prohibited  from  doing. 
A  promise  to  forbear  from  doing  any  act  which  is  con- 
trary either  to  the  common  law  or  to  statute  law  is  a 
nullity. 

17.  A  Payment  of  a  Part  of  a  Debt  is  no  Consideration 
for  a  Release  of  the  Whole.  —  Sometimes  it  happens  that 
a  man  will  discharge  a  part  of  his  legal  obligation  and 
receive  from  the  other  party  a  promise  that  no  further 
payment  will  be  demanded.  The  question  then  is, 
whether  the  payment  of  part  of  a  debt  is  a  sufficient 
consideration  for  the  release  of  the  whole.  Suppose  I 
owe  you  one  hundred  dollars,  which  I  declare  I  am  un- 
able to  pay,  but  offer  to  give  you  seventy-five  dollars 
at  once  if  you  will  accept  it  in  full  discharge  of  the  en- 
tire debt.  You,  thinking  you  will  never  get  any  more, 
accept.  Subsequently,  when  I  get  hold  of  some  more 
property,  you  sue  me  for  the  other  twenty-five  dollars. 
I  rely  upon  your  agreement  not  to  demand  the  remain- 
der of  my  debt  over  and  above  the  seventy-five  dollars 
which  I  paid  you.  You  contend  there  is  no  consid- 
eration for  this  agreement.  Assuming  that  you  had 
despaired  of  getting  anything  at  all,  the  question  might 
arise  whether  it  is  not  a  real  benefit  to  you  for  me  to 
pay  you   seventy-five   dollars.      We   should   have    to 


58  CONTRACTS 

answer,  No,  for  the  same  reason  we  gave  in  the  pre- 
vious illustrations.  You  are  legally  entitled  to  one  hun- 
dred dollars;  it  is  no  legal  benefit  for  you  to  receive 
seventy-five  dollars.  If,  however,  the  release  of  the 
remainder  of  the  debt  is  made  under  seal,  it  will  bind. 
This  rests  upon  the  rule  above  stated,  that  a  gratuitous 
promise  is  binding  if  made  under  seal. 

18.  Where  the  Debt  is  paid  with  Something  Different 
from  Money  the  Release  is  Binding.  —  In  the  illustration 
where  the  debtor  paid  seventy-five  dollars  and  received 
a  release  for  a  debt  of  one  hundred  dollars,  the  payment 
of  seventy-five  dollars  discharged  only  that  amount  of 
the  debt;  there  was  therefore  no  consideration  at  all 
for  the  release  of  the  remaining  twenty-five  dollars. 
But  the  debtor  may  pay  his  debt  with  something  dif- 
ferent from  monej' ;  if,  in  the  above  illustration,  I  offer 
you  a  horse  worth  seventy-five  dollars  in  full  satisfac- 
tion of  my  debt  of  one  hundred  dollars,  and  then  you 
sue  me  for  the  remaining  twenty-five  dollars,  you  have 
received  a  consideration  for  your  agreement  not  to  claim 
the  other  twenty-five  dollars.  Your  consideration  is 
the  horse. 

The  difference  is  that  in  this  case  I  give  you  a  thing 
or  chattel  whose  value  is  not  exactly  determinable. 
You  have  paid  one  hundred  dollars  for  a  horse  worth 
seventy-five  dollars,  but  that  is  your  own  affair.  The 
law  will  not  look  to  see  whether  you  have  made  a  bad 
bargain.  As  it  is  not  possible  to  calculate  exactly  the 
value  of  the  chattel  delivered  in  payment  of  the  debt, 
it  might  be  that  one  of  the  parties  would  consider  it 
to  be  worth  the  full  amount;  so  in  all  such  cases,  the 
contract  to  release  the  remainder  of  the  debt  is  held  to 
be  binding.     Even  where  the  chattel  is  sold  for  an 


FORM  AND  CONSIDERATION  59 

exorbitant  price,  that  fact  will  not  prevent  the  contract 
from  being  valid.  But  where  the  transaction  is  a  purely 
cash  one  on  both  sides,  there  cannot  be  said  to  be  any 
consideration  for  the  release  of  the  balance  unpaid. 

19.  Where  a  Number  of  the  Creditors  of  a  Debtor  agree 
to  accept  Part  of  their  Debts  in  Satisfaction  of  the  "Whole, 
the  Agreement  will  Bind.  —  We  have  seen  that  where  a 
single  creditor  accepts  a  portion  of  his  debt  in  satisfac- 
tion of  the  whole,  he  is  not  prevented  from  claiming  the 
remainder  at  some  future  time.  The  situation  is  dif- 
ferent, however,  when  several  creditors  mutually  agree 
to  release  the  debtor  from  all  future  claims  in  consid- 
eration of  the  payment  by  him  of  a  certain  percentage 
of  all  his  debts.  If  A,  B,  and  C  are  creditors  of  X, 
who  is  insolvent,  and  each  one  agrees  to  accept  fifty 
cents  for  every  dollar  of  his  debt,  and  to  release  the 
debtor  from  all  further  claims,  this  agreement  is  called 
a  composition  of  creditors,  and  is  binding. 

It  is  perhaps  rather  difficult  to  see  how  this  case  dif- 
fers from  the  one  given  above,  where  a  single  creditor 
accepted  seventy-five  dollars  in  satisfaction  of  a  debt 
of  one  hundred  dollars.  The  argument  that  there  is 
no  consideration  for  the  release  of  the  remainder  of  the 
debt  would  apply  here  as  between  any  single  creditor 
and  the  debtor;  yet  the  law  says  there  is  a  considera- 
tion, because  each  creditor  has  received,  in  addition  to 
his  fifty  cents  on  the  dollar,  a  promise  from  each  of  the 
other  creditors  joining  in  the  agreement,  that  he  will 
claim  nothing  beyond  that  per  cent.  So  each  one  has 
been  benefited,  because  he  has  received  that  which  he 
would  not  have  had  unless  these  mutual  promises  had 
been  made.  This  reasoning  is  open  to  the  objection 
that  the  consideration,   namely,  the  mutual  promises 


60  CONTRACTS 

of  the  creditors,  did  not  come  from  the  promisee,  the 
debtor  in  this  case.  Theoretically,  this  would  seem 
to  be  a  fatal  objection  to  the  validity  of  the  contract, 
although  some  writers  think  that  the  consideration  does 
come  from  the  debtor,  inasmuch  as  he  probably  was 
instrumental  in  procuring  the  mutual  promises  of  the 
creditors.  This  seems  to  be  rather  doubtful  reason- 
ing. Whether  or  not  it  can  be  justified  on  principle, 
it  is,  nevertheless,  true  that  a  composition  of  creditors 
is  held  valid. 

20.  An  Acceptance  of  a  Certain  Sum  as  a  Compromise  of 
a  Disputed  Claim  is  a  good  Consideration.  —  Remembering 
that  where  a  debtor  pays  a  part  of  an  ascertained  debt, 
a  single  creditor's  promise  to  release  him  from  the  re- 
mainder of  it  does  not  bind,  suppose  a  case  where  the 
amount  of  the  debt  is  in  dispute  between  the  parties. 
Suppose  the  creditor  thinks  it  is  one  hundred  dollars 
and  the  debtor  thinks  it  is  fifty  dollars.  In  order  to 
avoid  the  trouble  and  expense  of  a  lawsuit,  the  creditor 
agrees  to  accept  sixty  dollars  and  give  the  debtor  a  re- 
ceipt in  full,  which  he  does.  Afterwards,  both  parties 
discover  that  the  real  amount  owed  was  one  hundred 
dollars.  The  creditor  then  seeks  to  recover  the  remain- 
ing forty  dollars.  The  debtor  contends  that  he  has  been 
released  from  his  obligation,  by  virtue  of  the  creditor's 
promise  not  to  demand  more  than  the  sixty  dollars 
which  was  paid.  The  creditor  contends  that  there  was 
no  consideration  for  his  promise.  The  situation  here 
differs  somewhat  from  that  previously  considered,  inas- 
much as  the  parties  were  in  dispute  over  the  amount  of 
the  claim.  The  agreement  of  the  debtor  to  pay  sixty 
dollars  when  he  thought  his  claim  amounted  to  only 
fifty  dollars,  and  thus  avoid  litigation,  which  would  be 


FORM    AND   CONSIDERATION  61 

troublesome  and  expensive  to  both  parties,  is  sufficient 
consideration  to  support  the  creditor's  promise  not  to 
demand  the  other  forty  dollars.  A  compromise  of  a 
disputed  claim  is  always  valid.  The  creditor  accepts 
a  definite  for  an  indefinite  amount. 

21.  Real  Test  is  whether  any  Actual  Value  has  changed 
Hands.  —  After  reading  the  preceding  paragraphs,  we 
can  see  that  the  real  question  in  all  these  cases  is 
whether  any  real  value  has  passed  between  the  parties. 
These  illustrations  do  not  pretend  to  show  what  par- 
ticular acts  or  promises  will  amount  to  a  good  consid- 
eration, for  it  would  be  impossible  to  enumerate  them 
in  a  book  of  this  character.  They  aim  to  present  the 
essential  features  of  what  the  law  calls  consideration. 
It  is  impossible  to  lay  down  any  test  by  which  you  can 
always  determine  the  presence  or  absence  of  it.  We 
must  judge  each  case  by  the  peculiar  circumstances 
which  surround  it.  If  the  court  is  of  the  opinion  that 
a  real  value  has  been  given  in  return  for  the  promise, 
or  that  an  actual  detriment  has  been  suffered  on  account 
of  it,  the  contract  will  be  held  binding. 

22.  A  Past  Consideration  is  No  Consideration  at  all. — 
Up  to  this  point  we  have  been  seeking  to  throw  light 
upon  the  essential  nature  of  consideration.  We  now 
approach  the  question  from  a  little  different  standpoint. 
We  do  not  ask,  What  is  consideration  itself,  but,  When 
was  it  given  to  the  promisor?  The  point  here  insisted 
upon  is  that  the  consideration  must  have  been  given  in 
view  of,  and  on  account  of,  the  promise.  It  has  been 
shown  that  the  consideration  may  be  either  executed, 
that  is,  present;  or  executory,  that  is,  future;  but  if 
the  benefit  consists  of  some  value  given  in  the  past, 
before  the  promise  was  made,  it  is  not  a  consideration, 


62  CONTRACTS 

because  it  could  not  have  been  given  on  account  of 
the  promise. 

A,  who  was  a  resident  of  Massachusetts,  owned 
property  situated  in  Texas.  During  a  great  freshet 
this  property  was  in  imminent  danger  of  being  de- 
stroyed. B,  a  friend  of  A's,  spent  much  time  and 
money  in  strengthening  the  dikes  of  the  river,  and 
through  his  efforts  A's  property  was  saved  from  destruc- 
tion. Shortly  afterwards,  A  having  appeared  upon  the 
scene,  B  gave  him  an  itemized  account  of  the  expenses 
which  he  had  incurred,  and  this  amount  A  promised  to 
pay.  Subsequently  he  refused  to  carry  out  his  agree- 
ment and  B  brought  suit.  A  pleaded  no  consideration. 
At  first  thought  one  would  say,  "  Clearly  there  is  a  con- 
sideration, for  A  has  received  a  benefit,  and  certainly  B 
has  suffered  a  detriment."  But  consider  the  condition 
of  affairs  at  the  time  the  promise  was  made.  B  had 
already  completely  performed  the  services.  He  did 
nothing  in  consideration  of  A's  promise.  It  was  there- 
fore gratuitous  and  was  not  binding.  While  B's  per- 
formance of  these  services  for  A  created  a  motive  for 
the  promise,  it  did  not  constitute  a  consideration, 
because  it  was  not  done  on  account  of,  and  in  view  of, 
the  promise.  The  real  question  in  this  class  of  cases 
is  whether  the  promisee  has  changed  his  position,  that 
is,  has  given  value  or  suffered  loss  on  account  of  the 
promise  of  the  other  party.  If  he  has  not,  then  he 
cannot  be  said  to  have  given  consideration. 

A  sold  B  a  horse.  After  the  money  had  been  paid 
over,  and  B  was  about  to  lead  the  horse  away,  he  asked 
A  if  he  would  warrant  him  to  be  sound.  A  replied 
that  he  would.  The  horse  turned  out  to  be  unsound. 
B  sued  A  on  the  contract  of  warranty.     A  said  there 


FORM  AND  CONSIDERATION  63 

was  no  consideration.  It  was  contended  that  the  sale 
of  the  horse  was  a  sufficient  consideration  for  the  war- 
ranty. This  would  have  been  true  had  the  warranty 
been  made  before  the  bargain  was  consummated,  but 
here  the  sale  was  completed  before  anything  was  said 
about  the  soundness  of  the  animal.  The  warranty 
could  not  have  been  given  in  consideration  of  the  sale, 
because  the  bargain  was  made  and  the  parties  fully 
bound  before  the  question  of  the  warranty  was  intro- 
duced. The  consideration,  therefore,  being  past,  was 
in  reality  no  consideration  at  all,  and  B  could  not 
recover  for  the  breach  of  the  warranty. 

In  cases  where  services  have  been  performed  prior 
to  the  making  of  the  promise,  there  is  no  consideration 
for  the  agreement  to  pay.  A  was  running  for  Congress 
in  New  York.  B,  a  political  friend,  labored  assidu- 
ously in  his  behalf  and  spent  money  amounting  to  five 
thousand  dollars  for  traveling  expenses,  etc.  A  was 
elected  and,  upon  B's  presentation  to  him  of  a  bill  for 
his  expenses,  promised  to  pay  the  amount.  Upon  the 
foregoing  principles  you  can  readily  see  that  there  was 
no  consideration,  and  therefore  no  contract. 

23.  A  Fast  Consideration  will  support  a  Promise  if  it 
was  performed  at  the  Express  or  Implied  Request  of  the 
Promisor.  —  A  benefit  which  is  conferred  by  one  party 
upon  another  before  the  time  when  an  agreement  is 
entered  into  between  them,  and  before  there  is  any 
thought  of  such  a  contract,  is,  as  we  have  seen,  a  mere 
gratuitous  benefit.  It  cannot,  therefore,  ever  consti- 
tute a  consideration.  But  if,  while  no  contract  had 
been  entered  into  prior  to  the  giving  of  the  considera- 
tion, the  consideration  had  been  conferred  upon  the 
one  party  by  the  other  at  his  request,  the  case  would 


64  CONTRACTS 

differ  somewhat  from  those  we  have  been  considering. 
It  does  not  seem  just  to  excuse  a  man  from  a  promise 
which  he  has  made  in  consideration  of  some  past 
benefit,  when  that  benefit  was  conferred  upon  him  at 
his  own  request.  Consequently,  a  rule  of  law  has 
developed  which  holds  that  if  a  past  consideration  has 
been  given  at  the  request  of  the  promisor,  it  is  a 
sufficient  consideration  to  render  a  subsequent  promise 
valid  and  binding. 

In  a  case  which  was  decided  in  England  in  1615,  B, 
who  had  killed  an  Irish  political  leader  and  who  had 
been  indicted  for  murder,  asked  A  to  procure  for  him  a 
pardon  from  the  Crown.  A  traveled  all  over  Great 
Britain  at  a  great  expense  in  performing  this  request, 
and  finally  succeeded  in  procuring  the  desired  pardon. 
B  then  promised  to  reimburse  A  for  his  expenses.  That 
which  we  have  referred  to  as  a  past  consideration  may 
be  defined  to  be  a  gratuitous  act,  performed  prior  to  the 
making  of  the  promise.  But  in  this  illustration  could 
you  say  that  A's  efforts  to  do  what  B  had  expressly 
requested  him  to  do  were  gratuitous  acts  ?  By  a  gratui- 
tous act  is  meant  an  act  done  without  expectation  of 
reward,  i.e., if  I  do  some  act  for  you  without  any  request 
on  your  part,  either  express  or  implied,  I  do  it  gratui- 
tously, even  though  I  may  have  a  secret  belief  that  you 
will  pay  me.  In  this  case  the  act  was  not  done  gratui- 
tously because  B  had  asked  A  to  perform  it,  and,  in 
contemplation  of  law,  had  at  that  time  impliedly  prom- 
ised to  pay.  His  subsequent  express  promise  was  only 
putting  into  words  what  he  had  before  agreed  to  do 
by  implication.  Therefore  the  promise  was  held  bind- 
ing. 

Not  only  is  a  past  consideration,  performed  at  the 


FORM  AND  CONSIDERATION  65 

express  request  of  the  promisor,  a  good  consideration, 
but  it  is  also  sufficient  to  support  a  contract  if  it  was 
performed  at  the  implied  request  of  the  promisor.  If 
you  permit  another  to  perform  some  service  for  you, 
under  such  circumstances  that  no  reasonable  man  would 
think  he  was  intending  to  do  it  for  nothing,  you  will 
be  compelled  to  pay  him  a  proper  amount  if  you  sub- 
sequently promise  to  do  so.  By  permitting  him  to  do 
the  work  without  protest  on  your  part,  you  impliedly 
requested  Mm  to  do  it. 

24.  A  Promise  to  pay  an  Unenforceable  Debt  is  Binding. — 
We  now  come  to  a  class  of  cases  involving  a  past  con- 
sideration which  differ  slightly  from  those  we  have 
been  discussing.  There  is  a  statute  in  every  state  in 
this  country  providing  that  if  you  do  not  prosecute 
your  claims  within  a  reasonable  time,  stated  in  the 
statute,  you  will  not  thereafter  be  permitted  the  aid  of 
the  courts  in  so  doing.  Now,  suppose  you  owe  me  a 
debt  which  I  am  unable  to  collect,  by  virtue  of  the  fact 
that  a  time  longer  than  the  statutory  period  has  been 
allowed  to  expire.  I  come  to  you  and  request  you  to 
pay  your  debt,  although  I  am  aware  that  I  cannot  com- 
pel you  to  do  so.  You  then  promise  to  pay  me.  The 
question  is,  Can  that  promise  be  enforced?  The  au- 
thorities are  uniform  that  it  can.  How  do  we  escape 
the  rule  that  where  the  consideration  is  past  it  will 
not  support  the  promise? 

There  are  two  explanations  offered.  The  •  first  is, 
that  the  promisor  is  morally  bound  to  pay  the  debt, 
even  though  it  be  barred  by  the  lapse  of  time,  and  the 
promise  to  do  what  one  is  morally  bound  to  do,  is  based 
upon  a  sufficient  consideration.  The  second  explana- 
tion is,  that  a  promise  made  under  such  circumstances 


66  CONTRACTS 

does  not  create  a  new  obligation,  but  merely  revives 
the  old  debt  and  so  no  new  consideration  is  necessary. 
The  old  consideration  revives  together  with  the  old 
debt.  The  latter  is  probably  the  true  view.  A  moral 
obligation,  as  it  is  called,  is  not  generally  thought  to 
be  sufficient  to  support  a  promise. 

A  promise  to  pay  a  debt  which  is  unenforceable  by 
virtue  of  any  defence  interposed  by  the  policy  of  the 
law,  is  a  binding  promise.  The  original  debt  is  revived 
in  its  full  vigor.  As  illustrations  may  be  mentioned  a 
subsequent  promise  to  pay  a  debt  barred  by  the  statute 
of  limitations,  which  we  have  discussed ;  a  promise  to 
pay  a  creditor  the  full  amount  of  a  debt  from  which 
the  debtor  has  been  discharged  by  bankruptcy ;  and  a 
promise,  after  one  becomes  of  age,  to  pay  a  debt  con- 
tracted during  infancy. 

25.  A  Moral  Consideration  is  not  Sufficient  to  bind  a 
Contract.  —  We  referred  above  to  what  is  known  as  a 
moral  consideration.  If  a  man  is  morally,  though  not 
legally,  bound  to  pay  a  sum  of  money,  and  promises  to 
pay  it,  his  promise  is  said  to  be  based  upon  his  moral 
obligation  to  do  that  which  he  has  agreed  to  do.  There 
has  been  much  discussion  whether  a  promise  so  made 
can  be  enforced. 

A,  who  was  the  guardian  of  B,  expended  a  large 
sum  of  his  own  money  in  improving  property  belonging 
to  B,  the  ward,  so  that  he  was  able  to  sell  it  at  a  high 
figure.  B  subsequently  promised  to  pay  the  amount, 
but  afterwards  refused  to  do  so.  A  had  voluntarily 
done  B  an  act  of  kindness ;  by  the  judicious  expendi- 
ture of  his  own  money  he  had  saved  a  large  sum  to 
the  ward  without  making  the  latter's  estate  legally 
liable  to  repay  him.     B  was  certainly  bound  by  all  the 


FORM  AND   CONSIDERATION  67 

principles  of  morality  to  repay  such  fidelity.  And  since 
he  had  promised  to  pay,  it  was  very  strongly  argued 
that  his  promise,  coupled  with  the  moral  obligation, 
should  be  enough  to  bind  him.  But  it  was  decided  in 
a  case  where  the  facts  were  similar  to  those  we  have 
given,  that  a  moral  consideration  will  not  support  a 
promise.  As  was  pointed  out  by  the  court,  a  contrary 
doctrine  would  remove  the  necessity  for  any  considera- 
tion at  all,  inasmuch  as  merely  giving  a  promise  creates 
a  moral  obligation  to  perform  it.  If  the  doctrine  were 
admitted,  every  one  would  be  compelled  to  perform 
every  promise  which  he  made,  whether  it  were  based 
upon  a  consideration  or  not.  The  foregoing  view  is, 
generally,  the  law  on  the  subject,  although  some  courts, 
particularly  in  the  state  of  Pennsylvania,  are  still  in- 
clined to  doubt  whether  a  moral  consideration  is  not 
sufficient  to  bind  the  contract. 

26.  Provisions  of  the  Statute  of  Frauds. — Not  only 
must  all  simple  contracts  be  supported  by  a  considera- 
tion, but  some  of  them,  in  order  to  be  valid,  must  also 
be  expressed  in  writing.  In  England  and  in  the 
United  States,  acts  of  legislature  were  passed  a  great 
many  years  ago  which  provide  that  certain  classes  of 
contracts  shall  be  unenforceable  in  the  courts  unless 
they  have  been  reduced  to  writing.  These  statutes 
were  passed  "for  the  prevention  of  frauds  and  per- 
juries." It  is  not  necessary  that  the  contract  be  writ- 
ten in  any  particular  manner.  All  that  the  statutes 
mean  is  that  a  reasonably  definite  recital  of  its  terms 
shall  be  so  expressed.  Whether  the  contract  be  written 
or  not,  it  must  be  supported  by  a  consideration.  But 
assuming  the  contracts  in  themselves  to  be  perfectly 
good,  there  are  some  to  be  hereafter  referred  to  which 


68  CONTRACTS 

the  policy  of  the  law  deems  should  be  in  writing  to 
be  enforced  by  the  courts.  These  statutes  enumerate 
certain  contracts  for  which  written  evidence  seems  to 
be  particularly  desirable. 

27.  What  Contracts  must  be  in  Writing. — Without 
going  minutely  into  the  provisions  of  the  statute  of 
frauds,  the  most  common  contracts  which  must  be 
expressed  in  writing  will  be  briefly  enumerated.  If 
an  executor  or  administrator  (officers  whose  duties  are 
to  settle  up  estates  of  deceased  persons)  promises  to 
pay  out  of  his  own  pocket  any  loss  accruing  to  the  estate 
he  is  handling,  he  cannot  be  bound  by  his  promise 
unless  it  be  in  writing. 

Whenever  one  man  guarantees  that  another  will  pay 
his  debts,  or  if  he  promises  to  answer  for  the  default  of 
another  in  case  the  latter  embezzles  money  which  he  is 
handling,  or  in  any  case  where  one  person  binds  himself 
to  be  security  for  another,  he  cannot  be  held  to  his 
agreement  unless  he  has  bound  himself  in  writing.  A 
wished  to  borrow  five  hundred  dollars  from  B.  B  re- 
fused to  lend  it  to  him  unless  C  would  guarantee  that 
A  would  pay  it.  C  promised  that  he  would  pay  if  A 
did  not,  but  did  not  sign  any  written  contract.  When 
A  defaulted,  B  was  not  allowed  to  hold  C  responsible. 

All  agreements  made  in  consideration  of  marriage 
must  also  be  made  in  writing.  A,  who  was  about  to 
marry  B,  agreed  to  settle  lands  upon  her  in  considera- 
tion of  the  marriage.  This  agreement  was  not  reduced 
to  writing,  and  as  A  refused  to  perform,  there  was  no 
way  to  force  him  to  do  so. 

We  have  seen  that  a  deed  for  the  conveyance  of  land 
must  be  under  seal.  A  contract  for  the  sale  of  land, 
or  for  the  sale  of  any  right  in  or  concerning  land,  must 


FORM  AND  CONSIDERATION  69 

be  in  writing,  although  nothing  but  the  deed  of  con- 
veyance need  be  under  seal.  By  the  word  "land,"  in 
this  connection,  we  mean  not  only  the  ground,  but  also 
all  buildings  erected  thereon. 

Any  agreement  which  provides  for  its  future  per- 
formance at  a  time  more  than  one  year  after  the  date  on 
which  the  contract  is  made,  must  be  written,  or  it  can- 
not be  enforced.  If  A  agrees  to  hire  B,  B's  term  of 
service  to  begin  two  years  hence,  neither  party  will 
be  bound  unless  that  agreement  be  written. 

In  some  states  all  contracts  for  the  sale  of  goods 
above  a  certain  amount,  usually  fixed  at  fifty  dollars, 
must  be  in  writing.  This  provision  of  the  original 
statute  of  frauds  in  England  has,  however,  not  been 
adopted  in  all  the  states  of  this  country. 

28.  The  Effect  of  Failure  to  Reduce  such  a  Contract  to 
Writing.  —  You  remember  that  a  seal  makes  a  contract 
good  and  enforceable  in  itself,  whether  there  has  been  a 
consideration  or  not;  conversely,  if  a  gratuitous  promise 
is  made  in  writing  and  the  parties  neglect  to  affix  the 
seal,  the  paper  is  of  no  value  at  all.  But  this  is  not 
true  of  the  cases  we  are  now  considering.  In  the  first 
place,  the  fact  that  the  contract  is  in  writing  does  not 
make  it  good —  there  must  be  a  consideration ;  and,  in  the 
second  place,  if  the  writing  of  the  contract  be  omitted, 
that  does  not  render  it  void.  The  contract  itself  is 
good,  but  you  cannot  enforce  it  in  the  courts.  That 
sounds  like  an  absurd  statement,  but  there  is  a  distinct 
difference  between  the  two  situations,  as  may  be  seen 
from  a  study  of  the  following  explanation. 

The  law  of  the  place  where  a  contract  is  made  gov- 
erns its  validity.  That  is  the  rule  everywhere.  Now 
suppose  a  contract  is  made  in  France  which  provides 


70  CONTRACTS 

that  B  is  to  work  for  A  for  the  space  of  five  years  from 
date.  By  the  laws  of  France  such  a  contract  need  not 
be  written.  Suppose  the  parties  move  to  Pennsylvania 
in  this  country,  B  breaks  his  contract,  and  A  sues  him. 
This  contract  made  in  France  is  perfectly  good  accord- 
ing to  the  lex-loci  contractus,  i.e.  according  to  French 
law.  Ought  it  not,  therefore,  to  be  enforced  in  the 
Pennsylvania  courts?  That  brings  up  the  question 
whether  the  Pennsylvania  statute,  providing  that  such 
contracts  must  be  in  writing,  means  that  the  contract 
is  void  per  se,  because  it  is  not  in  writing,  or  merely 
that  the  court  will  not  allow  any  evidence  to  prove  its 
existence,  except  written  evidence.  If  it  means  the 
former,  —  if  the  statute  operates  on  the  contract  itself, 
—  then  A  can  recover,  because,  admittedly,  his  contract 
is  valid  by  French  law,  and  French  and  not  Pennsyl- 
vania law  governs  its  validity.  But  if  the  statute 
merely  lays  down  a  rule  of  evidence,  and  means  that 
when  any  contract  not  to  be  performed  within  a  year  is 
to  be  proved,  no  Pennsylvania  court  shall  receive  any 
but  written  evidence,  then  A  could  not  recover,  be- 
cause, while  his  contract  is  admittedly  valid,  he  can 
prove  its  terms  in  the  court  only  by  written  evidence, 
and  that  he  does  not  have.  The  latter  is  the  correct 
view.  In  such  a  case  A  could  not  recover.  So  we  see 
the  effect  of  the  statute  of  frauds  is  merely  to  lay  down 
a  rule  of  evidence  for  the  courts  to  follow ;  it  does  not 
touch  the  contract  itself. 


CHAPTER  V 

REALITY  OF  CONSENT 

1.  Necessity  for  real  Consent  of  the  Parties.  —  We 
have  discussed  three  of  the  five  elements  of  contracts ; 
namely,  the  capacity  of  the  parties,  the  necessity  for 
offer  and  acceptance,  and  the  necessity  for  the  presence 
of  either  form  or  consideration.  We  now  take  up  the 
fourth  essential  element,  which  is  called  "Reality  of 
Consent."  This  chapter  might  well  be  included  under 
the  heading  "  Offer  and  Acceptance,."  were  it  not  for 
the  fact  that  it  leads  us  into  a  discussion  somewhat 
foreign  to  the  elementary  treatment  of  the  formation  of 
the  contract.  When  we  say  there  must  be  reality  of 
consent,  we  mean  the  parties  must  have  arrived,  by  offer 
and  acceptance,  at  a  real  agreement.  The  law  will  hold 
people  to  a  definite,  legal  obligation,  called  a  contract, 
if  they  have,  by  words  or  conduct,  so  expressed  them- 
selves as  to  create  such  a  contract. 

But  suppose  the  agreement  concerned  a  ship  which 
at  that  time  was  at  the  bottom  of  the  sea,  or  suppose 
one  party  deceives  the  other  by  false  statements.  In 
the  one  case  there  could  be  no  contract  about  the  ship 
which  had  no  existence ;  in  the  other  there  ought  not 
to  be  a  contract,  because  the  deceived  person  gave  not 
a  real,  but  only  an  apparent  consent.  Although  the 
parties  may  seem  to  have  agreed,  their  agreement  may 
be  unreal  because  there  has  been  a  mistake  as  to  some 

71 


72  CONTRACTS 

important  fact  connected  with  the  transaction;  or  an 
innocent  misrepresentation  about  such  a  fact;  or  be- 
cause one  party  has  wilfully  deceived  the  other  by 
making  false  statements  to  him ;  or,  finally,  it  may  be 
unreal  because  force  or  undue  influence  has  been  used 
to  compel  one  of  the  parties  to  express  his  consent. 
We  must  discover  what  is  meant  in  the  law  by  these 
terms,  and  what  effect  such  conditions  will  have  upon 
the  contract. 

2.  Mistake.  —  The  first  one  of  these  elements  of  un- 
reality which  we  will  discuss  is  mistake.  When  we 
speak  of  it  in  this  sense,  we  mean  a  substantial  error 
about  some  material  fact  connected  with  the  transaction 
into  which  one  or  both  of  the  parties  have  fallen.  Mis- 
take must  be  distinguished  from  wilful  deception.  If 
the  error  has  been  brought  about  by  the  dishonesty  or 
double  dealing  of  either  party,  we  have,  not  mistake,  but 
misrepresentation  or  fraud,  which  we  will  discuss  later. 

We  must  also  distinguish  mistake  from  an  error 
of  judgment  as  to  the  advantages  to  be  derived  from 
the  contract.  In  many  cases  one  of  the  parties  to  a 
contract  wishes  that  he  had  never  entered  into  it  before 
he  has  finally  fulfilled  his  obligations  under  it.  He 
may  perhaps  have  made  a  mistake  as  to  the  profits  which 
he  was  likely  to  realize,  but  such  a  mistake  will  not  re- 
lease him  from  his  obligations.  We  must  also  exclude 
a  mistake  of  law.  Such  an  error  is  no  ground  for  re- 
leasing either  party  from  his  agreement.  It  should  be 
emphasized  that  in  order  to  affect  a  contract  the  mistake 
must  be  about  a  positive  fact. 

3.  Mistake  of  Judgment  distinguished  from  Mistake  of 
Fact.  — As  has  been  indicated,  an  error  in  judgment  is 
not  a  mistake  which  will  in  any  way  affect  the  validity 


REALITY   OF   CONSENT  73 

of  the  contract.  Suppose  you  have  learned  a  little 
about  diamonds  and,  under  the  impression  that  you  are 
an  expert  at  selecting  fine  stones,  you  go  into  X's  store 
to  purchase  a  ring.  In  examining  a  tray  of  paste  dia- 
monds you  see  among  them  a  stone  which  you  are  con- 
vinced is  a  real  diamond  of  the  finest  water.  Under 
the  belief  that  the  stone  is  worth  one  hundred  dollars, 
you  offer  X  ten  dollars  for  it,  and  he  accepts.  You  sub- 
sequently find  it  to  be  worth  fifty  cents.  You  cannot 
draw  back  from  your  agreement  to  pay  ten  dollars  for 
it.  You  trusted  to  your  own  judgment,  and  you  were 
deceived.     You  merely  cheated  yourself. 

4.  Mistake  as  to  the  Intention  of  the  Opposite  Party.  — 
We  have  seen  that  no  error  in  judgment  will  relieve 
3'ou  from  the  obligation  of  a  contract  into  which  you 
have  entered.  No  matter  how  much  you  may  have 
missed  the  true  value  of  an  article  which  you  were  buy- 
ing, if  you  bought  it  relying  entirely  upon  your  own 
judgment,  you  are  bound.  But,  again,  we  must  dis- 
tinguish such  an  error  in  judgment  from  a  mistake  as 
to  the  intention  of  the  opposite  party.  In  the  last 
illustration,  if  you  bought  the  stone  relying  entirely 
upon  your  own  judgment  as  to  its  value,  the  fact  that 
X  may  have  known  the  stone  not  to  be  a  diamond,  and 
that  he  may  have  known  that  you  thought  it  was,  would 
not  change  the  matter.  As  long  as  X  did  nothing  to 
deceive  you,  we  are  not  interested  in  what  he  thought, 
for  you  were  not  relying  upon  what  he  thought;  you 
were  relying  upon  what  you  yourself  thought.  But, 
on  the  other  hand,  if  you  buy  the  stone  under  the  im- 
pression that  X  has  warranted  it  to  be  a  diamond ;  if 
you  think  he  is  selling  it  to  you  for  a  diamond,  when 
in  reality  he  knows  it  is  not  a  diamond  and  does  not 


74  CONTRACTS 

intend  you  to  think  he  is  selling  it  as  such,  there  you 
have  made  a  real  mistake  —  you  think  he  is  promising 
you  a  diamond  when  he  is  not.  You  have  made  a  real 
mistake  as  to  the  intention  of  the  opposite  party  —  the 
state  of  his  mind  is  a  fact  about  which  you  have  fallen 
into  error  and  the  contract  is  of  no  validity. 

A  went  to  B  to  buj'  oats.  He  wanted  old  oats,  and 
thought  the  oats  he  was  buying  were  old ;  subsequently 
he  found  them  to  be  new.  He  then  refused  to  carry 
out  the  contract.  The  lower  court  said  there  was  no 
contract  if  "A  thought  he  was  buying  old  oats."  You 
can  see  that  this  was  not  a  correct  statement  of  the  law 
from  the  illustrations  we  have  had.  His  mistake  was 
an  error  in  judgment,  for  which  lie  had  only  himself  to 
blame.  Accordingly,  when  the  case  was  appealed  to 
the  upper  court,  they  reversed  the  decision,  saying 
there  was  a  contract  unless  A  thought  B  was  promising 
him  old  oats,  thus  laying  down  the  rule  given  above. 

5.  Mistake  as  to  the  Existence  of  Subject-matter.  — 
We  will  now  discuss  briefly  some  of  the  more  common 
kinds  of  mistake,  which  are  real  mistakes  of  fact  and 
which  do  affect  the  validity  of  the  contract.  Such  a 
mistake  often  occurs  about  the  existence  of  the  subject- 
matter  of  the  agreement.  A  sold  B  a  cargo  of  corn 
which  both  parties  supposed  to  be  on  board  ship  going 
from  Salonica  to  England.  As  a  matter  of  fact,  the 
grain  had  become  heated,  and  had  been  sold  at  Tunis 
for  what  it  would  bring.  Here  was  a  mistake  as  to  the 
existence  of  the  thing  about  which  the  agreement  was 
made.  Therefore  there  was  no  contract.  A  similar 
case  occurred  where  the  owner  of  an  opera  house  agreed 
to  lease  it  for  a  lecture ;  at  the  time  the  agreement  was 
made  the  opera  house  was  not  in  existence,  having  been 


REALITY  OF   CONSENT  75 

burned  down  the  night  before.  The  contract,  being 
founded  upon  mistake,  was  of  no  validity,  and  gave  rise 
to  no  action  of  damages  on  the  part  of  the  lecturer  on 
account  of  his  inability  to  give  the  lecture  and  his  loss 
of  the  expected  admission  receipts. 

6.  Mistake  as  to  the  Identity  of  the  Subject-matter.  — 
The  mistake  into  which  the  parties  fall  may  be  an  error 
as  to  the  identity,  instead  of  as  to  the  existence  of  the 
thing  about  which  they  are  contracting;  the  same  prin- 
ciples will  apply  in  both  cases.  When  two  parties  are 
endeavoring  to  agree  about  one  thing,  but,  owing  to  a 
mistake  of  one  or  both  of  them,  their  words  imply  an 
agreement  about  something  else,  the  mistake  is  just  as 
fatal  to  the  validity  of  the  contract  as  the  one  we  have 
previously  described.  A  sold  B  a  cargo  of  cotton,  to 
arrive  on  the  ship  Peerless  from  Bombay.  There  were 
two  ships  of  that  name  sailing  from  that  port.  A 
meant  one,  B  meant  the  other.  There  was  no  contract 
because  the  parties  made  a  mistake  as  to  the  identity 
of  the  thing  about  which  they  were  contracting. 

7.  Mistake  as  to  the  Identity  of  the  Contracting  Parties.  — 
There  may  also  be  a  mistake  as  to  the  identity  of  the 
persons  with  whom  you  are  contracting.  The  consent 
of  the  parties,  as  expressed  in  the  offer  and  acceptance, 
must  be  entirely  free  from  all  such  errors,  or  it  is  not 
real  consent.  If  you  contract  with  one  man,  thinking 
he  is  some  one  else,  you  have  given  no  real  consent, 
because  you  did  not  intend  to  contract  with  that  indi- 
vidual. X  had  been  accustomed  to  supply  B  with 
ice.  X  sold  his  business  to  A,  who  opened  the  mail 
addressed  to  the  firm  and  supplied  B's  orders.  After  B 
discovered  with  whom  he  was  dealing,  he  refused  to 
pay.     It  was  decided  that  he  was  not  obliged  to  do  so. 


76  CONTRACTS 

There  was  no  contract,  because  one  party  was  mistaken 
as  to  the  identity  of  the  other.  If,  however,  B  had 
accepted  the  ice  and  used  it,  after  knowing  who  had 
supplied  it,  lie  would  have  been  compelled  to  pay  for 
its  value,  although  he  would  not  under  any  circum- 
stances have  been  compelled  to  pay  according  to  the 
contract,  for  there  was  no  contract.  He  could  be  held 
liable  only,  if  at  all,  upon  another  principle  which  we 
will  not  attempt  to  explain  here,  which  is  called  the 
principle  of  "Quasi  Contract." 

8.  Mistake  as  to  the  Character  of  the  Transaction.  — 
Another  class  of  mistakes  is  where  one  or  both  parties  is 
in  error  as  to  the  nature  of  the  contract  into  which  he  is 
entering.  If  you  sign  a  paper  which  you  think  is  an 
indorsement  of  a  candidate  for  public  office,  but  which 
you  subsequently  discover  to  be  a  promissory  note  for  a 
large  sum  of  money,  you  have  not  really  entered  into 
any  contract,  because  you  never  consented  to  sign  a 
promissory  note.  If,  however,  you  were  careless  in 
signing  a  paper  which  you  had  not  read,  and  if  the 
question  as  to  who  should  be  the  loser  arose  between 
you  and  another  party  equally  innocent,  you  would 
probably  have  to  suffer. 

B,  a  very  old  man  who  was  scarcely  able  to  see, 
signed  a  paper  which  he  was  induced  by  another  party 
to  believe  was  a  receipt.  It  was  in  reality  a  bill  of 
exchange.  This  is  what  is  known  as  "negotiable 
paper,"  and  was  transferred  to  a  third  party,  A,  who 
sued  B.  Here  there  was  no  fault  in  either  of  these  two 
parties,  A  or  B.  There  was  a  pure  mistake,  i.e.  B  had 
made  an  error,  not  induced  by  his  own  negligence,  as 
to  the  character  of  the  paper  he  was  signing.  A  was 
not  allowed  to  recover  in  this  case,  as  B  was  held  not 


REALITY  OF  CONSENT  77 

to  have  contracted  to  pay.  There  was  a  mistake  as  to 
the  character  of  the  transaction.  If  there  had  been  the 
least  evidence  of  negligence  on  the  part  of  B,  A  would 
have  been  allowed  to  recover,  but  it  was  thought  that 
under  all  the  circumstances  of  the  case  B  was  not 
negligent  in  any  degree.  The  only  remedy  which  A 
would  have  would  be  a  claim  for  damages  against  the 
man  who  had  deceived  B. 

9.  Effect  of  Mistake  upon  the  Contract.  —  As  we 
pointed  out  at  the  beginning  of  the  subject  of  con- 
tracts, the  essential  elements  of  a  contract  must  be 
present  or  no  binding  agreement  is  created.  One  of 
these  essential  ingredients  is,  that  the  consent  expressed 
by  offer  and  acceptance  must  be  a  real  consent.  If  the 
expression  of  agreement  be  not  the  one  which  was 
intended  by  the  parties,  —  that  is,  if  one  or  both  parties 
make  a  mistake  as  to  some  vital  part  of  the  transaction,  — 
the  whole  contract  falls  to  the  ground  for  the  want  of 
one  of  these  essential  elements.  Mistake  renders  a 
contract  void,  or  it  is,  perhaps,  more  correct  to  say  that 
there  never  was  a  contract,  on  account  of  the  absence 
of  one  of  the  essential  elements. 

10.  Unrealities  of  Consent  which  do  not  absolutely  Vitiate 
the  Contract. — Mistake,  however,  is  only  one  of  the 
unrealities  of  consent.  The  other  forms  of  unreality 
differ  from  it  in  a  very  essential  particular.  The  agree- 
ment may  be  so  unreal  as  utterly  to  fail'  to  create  a  con- 
tract. This  is  the  case  if  there  has  been  a  mistake. 
It  is  possible,  however,  that  it  may  be  a  shade  less 
unreal,  in  which  case  the  contract  does  come  into 
existence,  but  the  unreality  of  agreement  gives  one 
party  an  opportunity  to  escape  from  his  obligation  if 
he  desires  to  do  so.     We  have  seen  that  if  A  sells  B  a 


78  CONTRACTS 

ship-load  of  corn  then  at  the  bottom  of  the  sea,  there  is 
no  contract  at  all.  But  if  A  sells  B  a  ship-load  of  corn 
which  he  says  is  first  grade,  when  it  is  spoiled,  there 
is  a  contract;  although  if  A  has  told  B  a  lie  about  the 
subject-matter,  it  seems  reasonable  to  allow  B  to  avoid 
the  contract  if  he  sees  fit,  whether  or  not  B  knew  what 
he  said  to  be  false.  In  the  one  case  he  would  be  guilty 
of  misrepresentation;  in  the  other  of  fraud.  Likewise, 
if  one  man  forces  another  to  sign  a  paper  at  the  point 
of  a  pistol,  or  if  one  party  be  unduly  influenced  by 
the  other,  the  contract  can  be  set  aside.  These  are 
all  examples  of  unreality  of  consent,  which  do  not, 
by  their  presence,  vitiate  the  contract  in  its  inception, 
but  give  one  party  a  loophole  by  which  to  escape  after 
the  contract  is  complete. 

11.  Misrepresentation.  —  We  will  take  up  these  vari- 
ous kinds  of  unreality  and  discuss  each  one  separately, 
first  considering  what  is  known  as  "misrepresenta- 
tion." One  naturally  thinks  of  misrepresentation  as 
describing  a  wilful  falsehood,  but  the  word  is  not  so 
used  in  this  connection.  It  is  applied,  for  want  of  a 
better  term,  to  misstatements  of  fact  made  by  one  party 
to  the  other  without  wrongful  intent,  e.g.  I  sell  you  a 
bar  apparently  of  gold,  which  I  really  think  to  be  gold, 
and  so  inform  you.  It  turns  out  to  be  brass.  There 
I  was  guilty  of  no  wrong,  and  yet  the  contract  may  be 
set  aside.  The  term  "misrepresentation"  is  used  to 
describe  innocent  misstatements  as  contrasted  with 
"  fraud, "  a  term  which  is  used  exclusively  to  describe 
wilful  and  malicious  or  careless  lying. 

12.  The  Question  is  whether  the  Misrepresentation-  is 
Part  of  the  Contract.  —  It  being  conceded  that  the  false 
statement  was  innocently  made,  the  problem  which  the 


REALITY  OF  CONSENT  79 

courts  have  to  solve  is  whether  the  representation  was 
or  was  not  of  such  a  character  as  to  give  one  party  the 
right  to  rescind.  The  representation  may  be  of  such 
a  nature  as  to  form  an  integral  term  of  the  contract,  or 
it  may  be  too  trivial  to  be  considered  a  part  of  it,  or  again 
it  may  be  an  important  representation  but  collateral  to 
and  not  part  of  the  agreement.  If  I  sell  you  a  stone 
which  I  honestly  believe  to  be  a  diamond,  and  which 
I  sell  to  you  as  a  diamond,  but  which  turns  out  to  be 
glass,  all  would  agree  that  the  representation  is  a  part 
of  the  contract.  But  if  I  sell  you  a  horse,  representing 
to  you  that  his  left  hind  foot  is  white  when  it  is  the 
right  foot  that  is  white,  probably  no  man  would  seri- 
ously contend  that  the  contract  should  be  avoided  for 
that  reason. 

Between  these  two  extreme  cases  we  find  many  in- 
stances where  it  is  very  difficult  indeed  to  tell  whether 
or  not  the  representation  is  intended  to  be  an  integral 
part  of  the  contract.  A  sold  hops  to  B.  Before  he 
closed  the  contract  B  inquired  if  any  sulphur  had  been 
used  in  the  cultivation  or  fertilization  of  the  hops,  as 
they  would  be  worthless  for  his  purposes  if  any  had  been 
so  used.  A  replied  that  none  had  been  used.  It  was 
afterwards  discovered  that  A  had,  by  way  of  experi- 
ment, used  a  small  quantity  of  sulphur  on  a  quarter  of 
an  acre  of  his  hop  field,  he  having  entirely  forgotten  the 
circumstance.  The  sulphur-raised  hops,  being  mingled 
with  the  rest,  spoiled  the  whole  for  B's  purposes.  He 
repudiated  the  contract.  The  court  decided  he  could 
do  so,  since  he  had  contracted  for  hops  untainted  by 
sulphur,  and  failed  to  get  what  he  bargained  for. 

13.  Representations  which  are  Part  of  the  Contract  dis- 
tinguished from  Warranties.  —  In  this  class  of  cases  it  is 


80  CONTRACTS 

often  very  difficult  to  ascertain  whether  the  representa- 
tion made  by  one  of  the  parties  is  intended  to  be  a 
term  of  the  contract  or  is  in  the  nature  of  a  collateral 
agreement  termed  a  warranty.  If  I  sell  you  a  horse, 
and  it  is  expressly  stipulated  that  the  contract  of  sale 
shall  be  void  if  the  horse  is  not  sound,  the  representa- 
tion that  the  horse  is  sound  is  one  of  the  essential 
elements  of  the  contract  because  it  is  involved  in  the 
consent  of  the  parties.  If,  however,  I  make  an  abso- 
lute sale  of  the  horse  to  you,  but  warrant  him  to  be 
sound  without  providing  that  the  contract  may  be 
rescinded,  then  if  he  is  found  to  be  unsound,  you  can- 
not repudiate  your  bargain.  In  the  one  case,  the  repre- 
sentation of  the  soundness  is  part  of  the  contract;  in 
the  other  there  are  two  contracts,  one  providing  for  the 
sale  of  the  horse,  the  other  providing  that  he  shall  be 
sound.  If  the  warranty  of  soundness  be  broken,  you 
may  sue  me  for  damages  for  the  breach  of  that  contract 
of  warranty,  but  the  contract  of  sale  remains  untouched. 
This  distinction  is  very  important  and  should  be  care- 
fully noted.  If,  in  the  illustration  given  in  the  pre- 
ceding paragraph,  it  had  been  understood  between  the 
parties  that  the  particular  hops  in  question  were  sold  by 
A  to  B,  and  that  A  guaranteed  them  to  be  free  from 
sulphur,  then  B  could  not  have  repudiated  his  agree- 
ment. He  could  sue  A  for  damages  for  the  breach 
of  the  warranty,  but  the  original  contract  would  be 
undisturbed. 

14.  Misrepresentation  as  to  Time.  —  Very  often  a  stipu- 
lation is  made  by  one  of  the  parties  as  to  the  time  when 
the  contract  is  to  be  performed.  The  question  then 
arises  whether  the  agreement  by  the  opposite  party  to 
perform  within  the  time  stipulated  is  a  part  of  the  con- 


REALITY  OF  CONSENT  81 

tract  itself,  and  therefore  would  give  rise  to  a  right  to 
rescind  it,  or  whether  it  is  a  mere  collateral  representa- 
tion which  may,  as  has  just  been  explained,  give  rise 
to  an  action  for  damages,  but  will  not  defeat  the  con- 
tract itself. 

B  agreed  with  A  that  his  ship,  which  was  "then  in 
the  port  of  Amsterdam,"  should  proceed  at  once  to 
Newport  and  take  on  a  load  of  coal  for  A  which  was 
to  be  shipped  to  Hong  Kong.  This  contract  was  made 
on  October  19,  1860.  B's  ship  was  not,  as  he  alleged, 
at  that  time  in  the  port  of  Amsterdam,  and  did  not 
reach  there  until  October  23.  A,  to  whom  time  was 
very  important,  then  repudiated  the  bargain  and  made 
other  arrangements.  That  brought  up  the  question 
whether  the  representation  as  to  time  was  an  integral 
part  of  the  contract,  or  whether  it  was  merely  a  promise 
made  outside  of  it.  In  the  former  case  A  could  repu- 
diate. In  the  latter  he  could  not,  although  he  would 
have  a  right  to  sue  for  the  breach  of  the  promise  that 
the  ship  was  at  that  time  at  Amsterdam.  The  court 
decided  it  was  part  of  the  contract  that  the  ship  was 
"then  in  the  port  of  Amsterdam,"  and  therefore  A  was 
allowed  to  repudiate. 

In  another  case  nearly  similar  to  this  one,  the  opposite 
conclusion  was  reached.  A  engaged  B,  an  actor,  to 
serve  through  the  season  and  to  arrive  four  days  before 
the  first  rehearsal.  B  did  not  arrive  until  two  days 
before  rehearsal.  A  endeavored  to  set  aside  the  con- 
tract, but  the  court  said  this  promise  was  not  part  of 
the  contract  itself.  It  was  independent  of  it,  and  its 
breach  gave  A  no  right  to  rescind. 

In  the  one  case,  the  representation  that  the  ship  was 
then  in  the  port  of  Amsterdam  was  considered  to  be  so 


82  CONTRACTS 

important  that  it  became  a  term  of  the  contract.  If  A 
had  known  that  the  ship  was  not  in  the  port  of  Amster- 
dam at  the  time  when  he  was  negotiating  with  B,  in  all 
probability  he  never  would  have  made  the  contract  at 
all.  On  the  other  hand,  in  the  latter  illustration,  the 
representation  on  the  part  of  the  actor  that  he  would 
arrive  four  days  before  the  first  rehearsal  was  not  con- 
sidered important  enough  to  be  deemed  a  term  of  the 
contract.  In  all  probability,  if  B  had  stated  that  he 
could  not  arrive  until  two  days  before  the  rehearsal,  he 
would  have  been  employed  in  spite  of  that  fact.  These 
two  illustrations  show  how  sometimes  the  element  of 
time  may  be  very  important  so  that  it  becomes  a  term 
of  the  contract,  and  in  other  cases  it  is  comparatively 
insignificant  and  is  probably  considered  by  the  parties 
as  a  collateral  stipulation.  The  mere  fact  that  time  is 
very  important  does  not  necessarily  mean  that  it  is  a 
term  of  the  contract,  but  it  is  very  strong  evidence 
that  the  parties  intended  it  to  be  so. 

15.  Misrepresentation  as  to  the  Subject-matter.  —  The 
most  common  kind  of  misrepresentation  is  that  relating 
to  the  character  of  the  thing  about  which  the  contract 
is  made.  It  is  very  easy  for  a  man  who  is  anxious  to 
sell  property  to  misrepresent  it  in  his  efforts  to  induce 
the  opposite  party  to  purchase.  It  would  be  impossible 
within  the  scope  of  this  book  to  attempt  to  enumerate 
the  instances  or  classes  of  such  misrepresentations. 
The  principle  underlying  all  of  them  is  this:  if  the 
representation  is  of  such  a  nature  that  the  opposite 
party  bought,  relying  upon  it,  and  if  it  is  considered 
by  the  court  to  be  a  term  of  the  contract,  then  it 
will  give  the  injured  party  a  right  to  repudiate  his 
bargain. 


REALITY  OP  CONSENT  83 

16.  Expression  of  Opinion  distinguished  from  Misrepre- 
sentation. —  There  are  some  representations  which  do 
not  in  any  way  vary  the  rights  of  the  parties,  among 
which  are  representations  as  to  insignificant  facts,  and 
those  which  are  mere  expressions  of  opinion  and  do  not 
purport  to  convey  any  information.  A  sold  B  a  horse, 
declaring  him  to  be  a  fine  traveler;  he  was  unable  to 
travel  at  a  greater  speed  than  five  miles  an  hour.  B 
asked  to  have  the  contract  set  aside,  but  his  request 
was  refused.  A's  statement  was  not  a  representation 
of  a  fact.  He  might  possibly  have  thought  that  the 
horse  was  a  fine  traveler,  even  though  his  speed  was 
slow. 

In  selling  land  an  auctioneer  declared  it  to  be  "  very 
rich  water  meadow  land."  The  land  was  not  rich; 
there  was  practically  no  water  on  it,  and  it  would  re- 
quire a  considerable  stretch  of  imagination  to  describe 
it  as  meadow  land,  but,  nevertheless,  the  court  said 
this  was  a  mere  flourishing  description  —  a  puffing  of 
the  article  to  be  sold.  It  amounted  to  a  mere  expres- 
sion of  opinion  on  the  part  of  the  auctioneer,  and  did 
not  vary  the  rights  of  the  parties. 

The  representation  must  always  stand  for  something 
definite,  or  the  opposite  party  cannot  take  advantage 
of  its  falsity  either  to  escape  from  his  contract  or  to 
recover  damages.  It  is  often  hard  to  determine  when 
the  representation  does  stand  for  a  fact.  A  sold  B  a 
hotel.  He  said  it  was  then  leased  to  a  "good  tenant." 
The  tenant  was,  in  fact,  a  poor  one,  inasmuch  as  he 
had  failed  to  pay  the  rent.  It  was  contended  that  the 
expression  "good  tenant"  was  a  mere  expression  of 
opinion  on  the  part  of  A,  and  meant  nothing  more  than 
a  glowing  description  of  the  desirability  of  the  purchase. 


84  CONTRACTS 

But  the  court  held  that  "good  tenant"  means  one  who 
pays  his  rent,  and  refused  to  execute  the  contract. 

17.  Misrepresentation  by  Failure  to  disclose  Material 
Facts. — Not  only  may  a  contract  be  set  aside  for  an 
actual  misrepresentation  about  a  material  fact,  but  in 
some  instances  by  a  failure  to  disclose  some  hidden 
fact.  There  are  some  kinds  of  contracts  in  which  one 
is  legally  bound  to  disclose  all  material  information, 
and  a  failure  to  do  so  is  in  itself  a  misrepresentation. 
Perhaps  the  most  common  of  these  classes  are  contracts 
of  insurance  and  for  sales  of  land.  As  all  who  have 
been  examined  for  life  insurance  know,  the  applicant 
is  expected  to  tell  all  about  his  previous  ailments.  If 
you  have  a  scrofulous  tendency  and  fail  to  inform  the 
examining  physician,  or  if  you  have  had  a  certain  dis- 
ease which  you  forget  to  mention,  you  are  liable  to  lose 
the  benefits  of  the  contract.  You  have  been  guilty  of  a 
misrepresentation.  It  is  customary  for  insurance  com- 
panies, however,  to  provide  in  their  policies  that,  after 
a  certain  term  of  years,  usually  two  or  three,  the  validity 
of  the  contract  shall  not  be  questioned  on  account  of 
misstatements  contained  in  the  application.  You  are 
bound  in  the  same  way  to  disclose  all  material  facts  in 
negotiating  for  marine  and  fire  insurance. 

It  is  also  your  duty  to  describe  correctly  land  which 
you  are  selling.  If  you  make  perfectly  innocent  mis- 
statements about  it,  or  unthinkingly  fail  to  give  full 
information,  the  opposite  party  may  abandon  the  con- 
tract. It  should  be  again  emphasized  that  the  misrepre- 
sentation or  failure,  whether  active  or  passive,  must 
relate  to  a  fact  which  is  material  to  the  contract. 

18.  Remedies  of  Injured  Party.  —  As  you  have  learned 
from  the  preceding  pages,  if  the  misrepresentation  forms 


REALITY  OF  CONSENT  85 

a  term  of  the  contract,  it  gives  the  injured  party  a  right  to 
rescind.  You  have  also  learned  that  although  the  mis- 
representation concerns  a  material  fact,  if  it  is  only 
collateral  to  the  contract,  and  not  a  part  of  it,  the 
injured  party  cannot  rescind,  although  he  may  sue 
for  damages.  In  the  former  case  he  has  the  option 
either  to  rescind  the  contract  or  to  sue  for  damages, 
as  he  prefers.  Should  he  choose  the  latter,  he  may 
recover  the  loss  which  he  has  suffered  by  reason  of  the 
falsity  of  the  opposite  party's  statement.  In  cases 
where  the  misrepresentation  is  collateral  to  the  con- 
tract, and  this  action  is  the  only  remedy  of  the  in- 
jured party,  the  amount  of  damages  to  be  recovered  is 
the  same. 

19.  Fraud.  —  We  now  leave  the  discussion  of  misrep- 
resentations which  have  been  made  innocently,  and 
come  to  those  which  have  been  made  with  an  intent  to 
deceive.  Such  misrepresentations  constitute  what  is 
known  as  fraud.  Fraud  consists  of  a  false  statement 
about  a  material  fact,  made  with  a  knowledge  of  its 
falsity,  or  with  a  reckless  disregard  of  its  truth,  and 
for  the  purpose  of  inducing  the  other  party  to  act  upon 
it.  As  we  shall  see,  when  a  man  is  guilty  of  fraud  he  is 
not  only  likely  to  lose  his  contract,  but  he  is  also  liable 
to  be  sued  in  an  action  of  tort  for  the  technical  wrong 
called  "  deceit."  In  such  a  case  he  is  responsible  for  the 
injury  actually  suffered  by  the  opposite  party  on  account 
of  his  false  statement,  and  he  maybe  also  compelled  to 
pay  damages,  imposed  as  a  means  of  punishment. 

20.  Statement  must  be  about  a  Material  Fact.  — We  will 
take  up  the  essential  elements  of  the  wrong  known  as 
fraud,  and  will  discuss  them  separately-  The  first  is 
that  which  we  have  discussed  in  relation  to  the  subject 


86  CONTRACTS 

of  misrepresentation,  namely,  that  the  statement  must 
be  a  false  statement  about  a  material  fact.  It  must 
not  relate  to  an  insignificant  matter  of  fact,  nor  to  a 
matter  of  law,  and  it  must  be  more  than  a  mere  expres- 
sion of  opinion.  I  may  say  that  a  piece  of  land  which 
I  am  attempting  to  sell  to  you  is  worth  one  hundred 
dollars  an  acre  when  it  is  worth  only  one  dollar  an 
acre ;  but  even  though  I  know  its  real  value,  that  state- 
ment will  not  constitute  fraud,  because  I  do  not  pretend 
to  be  stating  a  fact.  If,  however,  I  state  that  this  land 
has  been  sold  to  me  for  one  hundred  dollars  an  acre 
and  it  has  not,  that,  being  a  statement  about  a  material 
fact,  is  sufficient  to  constitute  fraud. 

21.  Statement  Must  have  been  Made  with  Intent  to 
Deceive.  —  The  second  essential  element  of  fraud  is 
that  the  false  statement  must  have  been  made  with  the 
intention  to  deceive,  that  is,  it  must  have  been  more 
than  a  gratuitous  lie,  told  merely  for  the  pleasure  of 
telling  it  and  for  no  ulterior  purpose.  This  does  not 
mean  that  the  statement  must  have  been  made  with  the 
intention  of  deceiving  the  party  to  whom  it  was  made, 
but  it  must  have  been  made  with  the  intention  of  deceiv- 
ing somebody.  A  sold  B  a  gun,  representing  it  to  be  safe 
and  to  have  been  made  by  a  reputable  firm.  Both  of  his 
statements  were  false.  The  gun  exploded  and  injured, 
not  B,  but  his  son,  who  was  then  using  it.  A  con- 
tended that  he  could  not  be  sued  in  deceit  on  account 
of  an  injury  to  the  son,  since  he  did  not  make  the  false 
statement  to  him ;  but  the  court  decided  against  him. 
He  intended  not  only  to  deceive  B,  but  also  to  deceive 
the  son  or  any  other  person  who  was  to  use  the  gun. 

22.  Party  deceived  must  have  acted  on  Account  of  the 
False  Statement.  —  Even  though  the  statement  may  have 


REALITY  OF  CONSENT  87 

been  made  with  the  intention  of  deceiving  the  opposite 
party,  if  he  was  not  deceived,  and  therefore  did  not 
suffer  damage  on  account  of  any  deception,  there  can 
be  no  recovery  of  damages  in  an  action  for  fraud. 
While  the  one  making  the  false  statement  would,  in 
such  a  case,  be  just  as  guilty  as  though  the  other  had 
been  actually  deceived,  yet  the  technical  wrong  of 
fraud  is  not  complete  until  the  opposite  party  has  acted 
on  account  of  the  false  statement  and  has  by  it  been  led 
into  damage.  A  sold  B  a  cannon.  There  was  a  hole 
in  it  which  A  concealed  by  filling  with  a  metal  plug. 
At  the  first  discharge  the  cannon  exploded.  It  appeared 
that  B  had  never  seen  it  before  the  explosion.  He 
could  not  therefore  have  been  deceived  by  A's  action. 
This  being  true  the  court  refused  to  hold  A  liable  in 
deceit. 

23.  Statement  Must  have  been  Known  to  be  False  or 
Must  have  been  Recklessly  Made.  —  The  last  essential 
element  of  fraud  is  the  one  which  is  most  difficult  to 
understand.  The  conception  of  fraud  involves  the  idea 
of  moral  wrongdoing  on  the  part  of  the  guilty  person. 
Assuming  the  statement  to  have  been  false,  and  the 
opposite  party  to  have  been  deceived,  yet  if  the  one  who 
made  the  statement  made  it  innocently,  he  is  not  guilty 
of  fraud.  The  question  which  is  difficult  to  determine  is 
when  he  is  really  innocent  and  when  he  either  knew  the 
statement  to  be  false,  or  deliberately  shut  his  eyes  to 
facts  which  would  have  disclosed  its  falsity  to  him.  In 
the  latter  case  he  is  said  to  have  been  recklessly  igno- 
rant, and  is  usually  considered  to  be  just  as  guilty  as 
he  is  when  he  wilfully  deceives.  If  the  party  knows 
the  statement  to  be  false,  the  solution  is  easy  —  he  is 
guilty.     But  it  is  often  very  hard  to  determine  whether 


88  CONTRACTS 

he  has  been  recklessly  ignorant  or  not.  Even  if  he 
has  been  recklessly  ignorant,  but  proves  conclusively 
that  he  honestly  believed  his  statement  to  be  true; 
ought  he  to  be  liable  for  deceit?  There  has  been  a 
great  deal  of  argument  on  this  question,  and  even  now 
there  is  not  unanimity  of  opinion  in  the  different 
courts. 

In  the  leading  English  case  on  this  subject  the  direc- 
tors of  a  proposed  street-railway  company  had  issued  a 
prospectus  in  which  they  declared  they  had  obtained  the 
right  to  run  their  cars  on  certain  streets.  This  was 
false.  The  directors  were  sued  by  shareholders  who 
had  purchased  stock  on  the  faith  of  their  false  repre- 
sentations. The  defendants  succeeded  in  satisfying  the 
jury  that  they  were  honest  in  their  belief  that  they  had 
the  privileges  which  they  claimed.  It  was  very  strongly 
argued  that,  as  the  directors  ought  to  have  known  the 
truth,  and  had  no  reasonable  grounds  to  believe  they 
had  been  granted  these  privileges,  they  should  be  held 
responsible.  But  the  court  said  it  made  no  difference 
whether  they  had  reasonable  grounds  for  believing  as 
they  did  or  not ;  if  they  actually  did  believe  what  they 
said  to  be  true,  then  they  were  not  chargeable  in  deceit. 
The  fact  that  they  did  or  did  not  have  reasonable 
grounds  for  their  belief  was  declared  to  be  valuable 
to  aid  the  jury  in  determining  whether  the  directors 
believed  their  own  statements,  but  otherwise  was 
thought  not  to  be  material.     That  is  the  English  view. 

The  American  view  seems  to  vary  slightly  from  it. 
The  American  courts  are  inclined  to  say:  If  a  man 
makes  a  declaration  false  in  fact,  he  makes  a  statement 
which  he  does  not  know  to  be  true ;  and  if  he  makes 
it  without  reasonable  and  probable  grounds  to  believe 


REALITY  OF   CONSENT  89 

in  it,  then  he  is  recklessly  ignorant  as  to  its  truth  or 
falsity,  and  should  be  held  liable  just  as  much  as  in 
cases  where  he  wilfully  lies.  The  latter  view  is  the 
correct  one.  It  works  substantial  justice  in  more  cases 
than  the  other,  for  it  is  extremely  difficult  or  impossible 
actually  to  determine  the  state  of  mind  of  the  party 
charged  with  the  fraud.  As  has  been  so  often  expressed 
by  the  courts,  man's  motives  must  be  judged  from  his 
acts,  God  alone  being  capable  of  reading  his  mind; 
consequently,  the  American  view,  which  assumes  that 
a  man  is  not  honest  in  his  statement  if  he  makes  it 
without  any  reasonable  grounds  for  believing  it  to  be 
true,  is  the  better  rule  of  the  two. 

24.  Remedies  of  the  Injured  Party.  —  It  remains  to 
consider  the  effect  of  fraud  upon  a  contract.  Just  as 
misrepresentation,  when  it  is  a  part  of  a  contract, 
destroys  its  binding  force,  so  will  fraud  render  it 
voidable,  i.e.  the  deceived  party  may  at  his  option 
carry  out  the  contract  and  charge  the  other  party  for 
the  loss  he  may  have  sustained,  or  he  may  repudiate 
it  altogether  and  rely  upon  a  suit  for  damages  for  re- 
dress. He  must,  however,  be  prompt  in  coming  to  his 
decision,  and  doing  one  thing  or  the  other.  If,  after 
he  is  fully  acquainted  with  all  the  circumstances  of 
the  fraud,  he  is  satisfied  to  go  on  with  the  contract,  and 
so  informs  the  other  party,  the  contract  may  be  said  to 
have  been  ratified,  and  may  not  thereafter  be  rescinded. 
If  he  decides  to  sue  for  damages,  he  may  recover  any 
loss  which  he  may  have  sustained,  provided  it  might 
reasonably  be  expected  to  result  from  the  fraudulent 
statement.  These  are  his  remedies  under  the  contract. 
If  he  does  not  wish  to  avail  himself  of  either  of  them, 
he  may,  in  an  action  of  tort,  recover  damages  not  only 


90  CONTRACTS 

for  the  loss  he  has  sustained,  but  also  what  are  known 
as  punitive  damages,  which  are  awarded,  not  only  to 
compensate  the  injured  party  but  also  to  punish  the 
guilty  one. 

25.  Duress.  —  Another  form  of  unreality  of  consent 
which  sometimes  renders  a  contract  voidable  is  what 
is  known  as  duress.  Duress  consists  of  any  actual  or 
threatened  violence  offered  to  a  man,  or  to  any  member 
of  his  family,  in  order  to  force  him  to  enter  into  a  con- 
tract. If  he  does  enter  into  an  agreement  under  such 
circumstances,  he  is  said  to  contract  under  duress,  and 
he  may  avoid  the  contract  so  made  if  he  desires  to  do 
so.  It  is  very  clear  that  there  is  in  such  a  case  no  real 
consent.  The  will  is  overpowered  by  a  fear  of  injury, 
just  as  in  the  case  of  fraud  or  misrepresentation  the 
judgment  is  deceived.  In  both  cases  the  consent  is 
only  nominal,  not  real. 

26.  Undue  Influence.  —  Very  nearly  akin  to  duress  is 
undue  influence.  This  consists  of  influences  of  various 
kinds  brought  to  bear  upon  a  man  to  make  him  do  some- 
thing of  which  his  better  judgment  disapproves.  It  is 
much  harder  to  prove  than  duress,  because  it  is  more 
insidious.  The  most  common  instance  is  in  the  case 
of  a  testator  making  a  will.  While  a  will  is  not  a  con- 
tract, the  principles  relating  to  undue  influence  are  the 
same  as  applied  to  both;  and  cases  where  undue  influ- 
ence is  alleged  as  a  means  of  attacking  the  validity  of  an 
instrument  arise  far  more  frequently  in  the  case  of  wills 
than  in  the  case  of  contracts.  It  frequently  happens 
that  some  near  relative  or  friend  will  so  work  upon  the 
feelings  of  an  old,  and  perhaps  feeble  man,  as  to  induce 
him  to  make  a  will  or  sign  a  contract  of  which  his 
sober  judgment  would  not  approve.      The  difficulty  in 


REALITY  OF  CONSENT  91 

such  cases  is,  first,  to  prove  the  influence ;  and,  second, 
to  determine  when  proper  influence  ceases  and  undue 
influence  begins. 

Undue  influence  is  usually  defined  to  be  such  as  over- 
powers the  volition,  without  convincing  the  judgment. 
As  a  general  rule,  the  party  seeking  to  set  aside  the 
instrument  on  the  ground  that  one  party  to  it  was  unduly 
influenced  must  allege  and  prove  the  undue  influence. 
In  certain  classes  of  cases,  however,  the  burden  of  proof 
is  said  to  shift,  and  the  duty  of  proving  that  there  has 
been  no  undue  influence  falls  upon  the  defendant.  If 
a  child  makes  a  sale  of  land  to  his  father  for  a  very 
inadequate  consideration  and  the  transaction  is  at- 
tacked, the  father  would  probably  be  called  upon  to 
show  that  the  child  had  had  independent  advice  and 
was  not  unduly  influenced  by  him.  The  same  rule 
holds  true  whenever  the  court  thinks,  from  the  nature 
of  the  transaction,  that  a  presumption  of  undue  influ- 
ence has  arisen.  Undue  influence,  like  fraud  and 
duress,  renders  a  contract  voidable  at  the  instance  of 
the  injured  party. 


CHAPTER  VI 

LEGALITY   OF   OBJECT 

1.  Necessity  for  Legality  of  Object.  —  All  the  elements 
of  a  contract  thus  far  discussed  may  be  present,  —  the 
parties  may  have  been  capable  of  contracting,  they  may 
have  expressed  their  agreement  in  the  proper  form,  a 
valid  consideration  may  have  been  given,  and  the  con- 
sent so  expressed  may  have  been  a  real  consent, — yet 
the  contract  will  not  be  good  unless  the  objects  contem- 
plated by  it  are  legal.  By  this  we  mean  that  the  purpose 
of  the  contract  must  be  a  proper  and  lawful  one.  In 
general,  all  contracts  are  deemed  legal.  Every  one  is  at 
liberty  to  enter  into  an  agreement  with  some  one  else, 
if  he  chooses  to  do  so.  Those  contracts  only  are  illegal 
which  are  forbidden  by  the  law.  Just  as  we  discussed 
the  incapacity  rather  than  the  capacity  of  the  parties, 
so  we  must  now  discuss  illegality  instead  of  legality 
of  the  object,  for  illegal  objects  are  far  less  numerous 
than  those  which  are  legal.  The  objects  of  a  contract 
may  be  illegal  because  they  are  forbidden  by  statute 
law,  or  because  they  are  contrary  to  the  common  law. 

2.  Objects  Forbidden  by  Statute.  —  Sometimes  an  act  of 
legislature  or  an  act  of  Congress  forbids  certain  con- 
tracts to  be  made.  We  shall  not  attempt  to  name  the 
various  statutory  prohibitions  which  have  been  imposed, 
as  it  would  be  quite  impossible  to  do  so.  The  statute 
may  forbid  a  certain  class  of  contracts  to  be  made,  or  it 

92 


LEGALITY  OF  OBJECT  93 

may  declare  that  if  made  they  shall  be  void,  or  it  may 
impose  a  penalty  upon  all  persons  who  enter  into  them. 
In  the  last  case  the  contract  itself  is  valid,  although 
the  parties  who  entered  into  it  will  be  compelled  to  pay 
the  penalty.  But  if  the  statute  either  forbids  the  con- 
tract to  be  made,  or  provides  that  it  shall  be  void,  no 
rights  can  be  acquired  under  it. 

3.  Effect  of  Illegality  upon  Collateral  Transactions.  — 
The  reason  for  making  a  distinction  between  con- 
tracts which  the  statute  declares  to  be  void  and  those 
which  it  forbids,  is  the  different  effect  upon  other  con- 
tracts growing  out  of  them.  A  contract  forbidden  by 
a  statute  is  not  only  void  in  itself,  but  it  is  so  tainted 
with  illegality  that  other  contracts,  perfectly  innocent 
in  themselves,  may  also  be  void  if  they  are  in  any  way 
connected  with  the  forbidden  contract.  On  the  other 
hand,  if  the  contract  is  merely  declared  to  be  void  by 
the  statute,  it  is  not,  strictly  speaking,  illegal.  Other 
contracts  growing  out  of  it  are  not  void  simply  because 
they  have  some  connection  with  it. 

For  instance,  in  England  a  statute  has  been  passed 
which  provides  that  wagering  contracts  shall  be  void. 
If  A  makes  a  bet  with  B,  loses,  and  pays  his  bet  with  a 
promissory  note  for  one  hundred  dollars,  that  promis- 
sory note  would  be  valid,  although  it  was  given  in 
payment  of  a  debt  arising  from  an  illegal  contract. 
But  if  the  statute  had  forbidden  any  wagering  con- 
tracts to  be  made,  then  the  promissory  note  would  be 
void  as  well  as  the  contract  itself.  In  some  states  in 
this  country  statutes  have  been  passed  which  provide 
not  only  that  wagering  contracts  shall  be  void,  but 
that  all  contracts,  like  that  mentioned,  arising  out  of 
them  shall  be  void  also.     In  such  a  case,  obviously, 


94  CONTRACTS 

neither  of  these  contracts  would  have  conferred  any 
rights  on  any  one. 

4.  Objects  contrary  to  the  Common  Law.  —  Not  only 
may  contracts  be  void  because  they  violate  a  statutory 
provision,  but  they  may  also  be  void  because  they  are 
contrary  to  the  rules  of  common  law.  Any  contract  to 
commit  a  crime  or  to  do  a  civil  wrong  is  absolutely 
void.  A  hires  B  to  commit  murder.  After  the  com- 
mission of  the  crime  it  is  very  clear  that  B  can  not 
claim  his  compensation  from  A  in  a  court  of  law.  The 
result  will  be  the  same  if  A  has  hired  B  to  rob  a  house 
or  to  bribe,  or  to  commit  any  offence  which  is  recog- 
nized by  the  common  law  as  a  crime  or  misdemeanor. 

5.  Agreements  contrary  to  Public  Policy;  Immoral 
Agreements.  —  There  is  another  class  of  contracts  which 
are  void  because  they  are  contrary  to  the  common  law, 
though  their  opposition  to  it  is  not  nearly  so  easy  to 
determine.  This  class  embraces  those  contracts  which 
are  said  to  be  contrary  to  "public  policy."  "Public 
policy"  is  a  term  which  is  extremely  difficult  to 
define.  Anything  which  is  detrimental  to  the  public 
welfare  is  deemed  contrary  to  public  policy,  and,  as 
may  readily  be  surmised,  this  term  is  extremely 
elastic  and  capable  of  innumerable  interpretations. 
There  are,  however,  several  classes  of  agreements 
which  are  generally  recognized  as  being  contrary  to 
public  policy,  and  are  void  for  that  reason.  Immoral 
agreements  constitute  one  of  these  classes.  No  expla- 
nation is  necessary  to  illustrate  what  is  meant  by  this 
term,  for  the  name  explains  itself.  Any  agreement 
which,  though  it  does  not  contemplate  a  crime  or  mis- 
demeanor, has  for  its  object  a  purpose  generally  recog- 
nized to  be  contrary  to  good  morals,  is  void. 


LEGALITY  OF  OBJECT  95 

6.  Agreements  tending  to  defeat  Justice.  —  There  are 
some  kinds  of  agreements  which  have  a  tendency  to 
defeat  justice.  Such  agreements  are  contrary  to  public 
policy  because  they  are  said  to  "pervert  the  course  of 
justice."  If  two  men  agree  to  refer  all  matters  in  dis- 
pute which  may  hereafter  arise  between  them  to  arbi- 
trators to  determine,  instead  of  going  to  a  court  of 
law,  such  an  agreement  is  void.  It  is  void  because 
it  removes  disputes  arising  between  them  from  the 
proper  place  where  such  disputes  should  be  deter- 
mined, that  is,  the  courts,  and  takes  them  to  a 
tribunal  created  by  the  parties  themselves.  Two  parties 
may  make  a  valid  agreement  to  refer  a  particular  dis- 
pute to  arbitrators  to  decide,  instead  of  going  to  law 
about  it,  and  such  an  agreement  will  bind  them  so  that 
neither  can  recover  in  a  suit.  But  an  agreement  to 
refer  all  matters  to  arbitrators  is  considered  to  be  con- 
trary to  public  policy  because  it  "ousts  "  the  jurisdic- 
tion of  the  courts. 

On  the  same  principle,  any  agreement  to  conceal  your 
knowledge  of  a  crime  which  has  been  committed,  or  to 
secrete  witnesses,  or  to  prevent  criminals  from  being 
brought  to  justice,  or  to  do  any  act  which  in  any  way 
tends  to  hinder  or  delay  the  courts  in  their  work  in 
deciding  litigation  or  in  bringing  criminals  to  justice, 
is  void. 

7.  Agreements  tending  to  promote  Litigation. — Any 
agreement  which  has  for  its  object  the  promotion  of 
litigation  in  the  courts  is  void.  The  policy  of  the  law 
is  against  allowing  men  to  stir  up  trouble  merely  for 
the  pleasure  of  having  disputes.  If  a  man  has  been 
injured,  and  is  in  good  faith  seeking  redress,  he  will 
receive  the  assistance  of  all  the  machinery  of  justice. 


96  CONTRACTS 

But  if  he  is  attempting  to  arouse  quarrels  among  his 
neighbors,  either  for  the  mere  pleasure  of  doing  it, or 
for  the  hope  of  ultimate  gain  to  himself,  he  cannot 
invoke  the  assistance  of  the  courts. 

If  you  have  been  injured  through  the  carelessness  of 
an  engineer  employed  by  a  railroad  company,  you  may 
sue  the  railroad  and  recover  damages.  But  you  cannot 
sell  your  right  to  sue  to  some  one  else.  This  may 
seem,  in  one  sense,  like  a  hardship,  because  very  often 
poor  people  are  injured  who  have  no  means  with  which 
to  employ  counsel  to  enforce  their  claims.  But  if  it 
were  permitted  for  one  man  to  sell  his  bare  right  to  sue 
to  another,  we  should  soon  have  speculators  whose 
only  business  would  be  to  go  about  the  countiy  ascer- 
taining who  had  been  injured,  buy  their  claims  for  small 
amounts,  and  then  sue  those  who  had  been  responsible 
for  the  injuries.  This  objection  to  the  rule  forbidding 
the  sale  or  assignment  of  a  right  to  sue  is  not  so  strong 
as  formerly,  since  "  contingent  fees "  are  now  sanc- 
tioned by  the  courts.  A  man  without  means  who  de- 
sires to  sue  for  damages,  on  account  of  injuries  which 
he  has  received,  is  permitted  to  make  a  contract  with 
an  attorney  by  which  the  latter  is  to  receive  a  certain 
percentage  of  the  amount  recovered.  This  arrangement 
permits  a  poor  man  to  employ  the  services  of  counsel 
when  he  has  no  money  to  pay  his  fee. 

It  sometimes  happens  that  property  is  sold  which  has 
been  injured  through  the  wrongdoing  of  some  one  else. 
If  you  are  the  owner  of  a  valuable  horse  which  has 
been  injured  by  a  wrongful  act  of  X,  and  you  sell  a 
number  of  horses  to  me,  among  which  is  the  injured  one, 
I  may  sue  X  for  the  injury  done  to  the  horse  which  now 
belongs  to  me.      You  may  sell  to  me  a  right  to  sue 


LEGALITY   OF   OBJECT  97 

under  such  circumstances.  The  distinction  between 
this  case  and  the  other  is  that  here  you  do  not  sell  the 
mere  right  to  sue,  you  sell  the  horse ;  the  right  to  sue 
goes  with  the  purchase.  As  a  general  rule,  any  agree- 
ment which  tends  to  promote  litigation  is  void. 

8.  Agreements  in  Restraint  of  Marriage.  — Any  agree- 
ment which  tends  to  restrain  the  freedom  of  marriage 
is  void.  The  policy  of  the  law  is  in  favor  of  marriage, 
and  anything  tending  to  prevent  it  is  therefore  con- 
trary to  public  policy.  A  promised  X,  under  seal, 
binding  himself  by  a  penalty  of  one  thousand  dollars, 
that  he  would  marry  no  one  but  her.  The  contract 
was  held  void  because  it  had  a  tendency  to  promote 
celibacy.  In  the  same  way,  any  agreement  which  tends 
to  separate  husband  and  wife,  or  to  prevent  their  living 
together  again,  if  already  separated,  is  void.  A  in  his 
will  provided  that  fifty  dollars  a  week  should  be  paid 
to  his  daughter  so  long  as  she  should  live  separate 
from  her  husband.  Even  though  it  be  given  by  a  will, 
which  is  construed  much  more  liberally  than  a  con- 
tract, such  a  gift  is  invalid  because  it  holds  out  induce- 
ments to  the  wife  to  live  apart  from  her  husband. 

9.  Agreements  in  Restraint  of  Trade.  —  If  two  or  more 
parties  enter  into  any  agreement  which  has  a  tendency 
to  restrain  the  freedom  of  trade,  such  an  agreement  is 
void.  A,  who  was  a  manufacturer  of  machinery,  sold 
his  business  to  B,  conveying  to  him  the  good-will  as 
well  as  the  plant,  and  agreed  never  again  to  engage  in 
a  similar  business.  The  agreement  was  held  void  as 
being  contrary  to  public  policy.  Waiving  for  a  moment 
the  discussion  as  to  the  correctness  of  this  decision,  we 
may  observe  that  it  is  always  proper  for  a  man  in  sell- 
ing the  good-will  of  his  business  to  agree  not  to  engage 


98  CONTRACTS 

again  in  the  same  business  in  the  same  place,  or  within 
a  reasonable  distance  therefrom,  or  perhaps  not  at  all 
within  a  limited  time.  This  would  be  necessary  in 
order  to  protect  the  purchaser.  But,  under  ordinary 
circumstances,  an  agreement  never  again  to  engage  in 
the  same  business  is  thought  to  be  an  agreement  in 
restraint  of  trade.  Suppose,  however,  that  you  are  a 
manufacturer  of  a  peculiar  kind  of  rifle,  which  is  pro- 
duced by  no  other  manufacturing  company  in  the  world. 
You  therefore  supply  the  markets  of  the  world;  suppose 
you  sell  your  business,  with  its  good-will,  to  me;  my 
purchase  would  be  valueless,  if  you,  with  all  your  expe- 
rience and  your  intimate  association  with  the  govern- 
ments who  were  your  purchasers,  should  again  engage 
in  the  same  business  and  compete  with  me.  Under 
such  circumstances,  an  agreement  by  you  that  you 
would  never  again  engage  in  the  same  business,  would 
be  binding.  No  precise  rule  can  be  laid  down  with 
regard  to  this  question.  The  courts  will  always  examine 
the  facts  of  each  particular  case  and  endeavor  to  ascer- 
tain whether  or  not  the  agreement  be  a  reasonable  one. 
Perhaps  the  kind  of  agreement  in  restraint  of  trade 
which  is  now  occupying  public  attention  more  than 
any  other,  is  the  agreement  which  tends  to  promote  a 
monopoly  and  to  stifle  competition.  The  combinations 
of  capital  familiarly  known  as  trusts,  which  have  for 
their  object  the  promotion  of  the  interests  of  the  vari- 
ous contracting  firms  and  the  prevention  of  competition 
by  outside  parties,  are  contrary  to  the  common  law 
because  they  are  in  restraint  of  trade.  Contracts 
between  these  various  firms,  which  have  for  their 
object  the  promotion  of  monopolistic  interests,  are  void 
as  between  themselves ;  yet,  inasmuch  as  all  the  parties 


LEGALITY  OP  OBJECT  99 

of  the  contract  are  willing  to  perform  it,  and  it  is  to 
their  own  interest  not  to  break  it,  it  is  impossible  to 
prevent  such  combinations  under  the  present  laws. 
Congress  has  under  advisement  at  the  present  time  a 
project  to  pass  a  bill  drafted  in  such  a  form  that  it  will 
be  possible  to  prosecute  criminally  the  officers  and  mem- 
bers of  corporations  or  firms  which  enter  into  such  con- 
tracts. Whether  or  not  such  a  law  can  be  successfully 
enforced,  is  perhaps  a  question.  It  is  almost  impossible 
to  secure  sufficient  evidence  to  convict  the  offender. 

10.  Effect  of  Knowledge  of  Illegal  Purpose.  —  Some- 
times a  contract  will  be  entered  into  between  two  per- 
sons, one  of  whom  is  aware  of  an  illegal  purpose  while 
the  other  is  not.  A  hired  a  brougham  to  B,  which  was 
to  be  used  for  an  immoral  purpose;  A,  not  having 
known  this,  sued  B  for  the  hire  of  the  vehicle.  The 
court  allowed  him  to  recover,  saying,  as  far  as  he  was 
concerned,  the  transaction  was  legal.  This  rule,  how- 
ever, holds  good  only  in  a  case  where  the  contract  is 
apparently  a  perfectly  innocent  contract.  Where  its 
illegality  appears  upon  its  face,  neither  party  has  any 
rights  under  it. 


SECTION  II 
PERSONS  AFFECTED  BY  CONTRACT 


CHAPTER  I 


UPON  WHOM  THE  FORMATION  OF   CONTRACT  MAY 
CONFER  RIGHTS  AND  LIABILITIES 

1.  General  Rule  as  to  Persons  affected  by  Formation  of 
Contract.  —  In  the  preceding  section  of  this  book  we 
have  discussed  the  manner  in  which  a  contract  may  be 
created.  We  now  assume  that  a  valid  contract  has 
been  formed,  and  apply  ourselves  to  the  task  of  discov- 
ering upon  whom  it  may  confer  rights  and  upon  whom 
liabilities.  Having  secured  our  contract,  we  wish  to 
know  what  persons  are  bound  under  it  and  who  may 
enforce  these  obligations.  It  may  be  laid  down  as  a 
general  proposition  that  the  only  persons  who  acquire 
rights  or  liabilities  by  the  formation  of  a  contract  are 
those  who  are  parties  to  it.  The  one  who  gives  the 
consideration  should  receive  the  benefit,  and  he  who 
makes  a  promise  should  perform  it.  It  is  possible  for 
one  man  to  substitute  another  for  himself  after  the 
contract  has  been  made ;  but,  except  in  very  rare  in- 
stances, the  persons  who  contract  cannot  vary  the 
rights  of  others. 

100 


EIGHTS  AND  LIABILITIES   OF   PARTIES  101 

2.  Exception  to  the  Rule  under  Certain  Conditions.  — 
The  rule  above  given  is  almost  universally  true.  If 
I  contract  with  you  that  I  will  pay  X  one  hundred 
dollars,  that  contract  confers  no  rights  upon  X,  and 
he  cannot  sue  me  for  the  one  hundred  dollars.  The 
English  law  is  emphatic  on  this  point;  it  says  that 
under  no  circumstances  can  a  third  party  obtain  a  right 
by  virtue  of  a  contract  to  which  he  is  a  stranger.  Under 
most  circumstances  this  rule  is  correct  in  America; 
but  in  certain  peculiar  cases  it  has  been  somewhat 
altered  to  meet  obviously  sensible  requirements.  Sup- 
pose I  owe  you  one  hundred  dollars,  and  you  owe  X  one 
hundred  dollars.  Your  debt  to  X  is  due,  and  he  comes 
and  demands  his  money.  Being  unable  to  pay  him  you 
agree  with  him  that  instead  of  paying  my  debt  of  one 
hundred  dollars  to  you,  I  shall  pay  it  directly  to  X. 
Then  you  come  to  me,  and  we  agree  that  I  shall  pay 
the  one  hundred  dollars  to  X,  in  accordance  with  your 
arrangement  with  him.  In  consideration  of  this,  you 
release  me  from  my  debt  to  you.  In  such  a  case  as 
that,  it  certainly  seems  as  though  X  should  be  allowed 
to  sue  me  if  I  refuse  to  pay.  He  could  not  do  so  in 
England  because  the  consideration  did  not  come  from 
him ;  but  he  may  in  most  of  the  states  in  this  country. 
In  ordinary  situations,  the  rule  is  that  A  and  B  con- 
tracting together  can  confer  no  rights  upon  C. 

3.  Contracting  Parties  cannot  impose  Liabilities  upon 
Third  Persons.  —  Although  there  may  be  some  instances 
where  contracting  parties  may  confer  rights  upon  third 
persons,  the  rule  is  perfectly  well  settled  that  two  per- 
sons contracting  together  cannot  bind,  or  in  any  way 
impose  obligations  upon,  a  third.  This  seems  to  be 
nothing  more  than  common  sense.     Certainly,  a  man 


102  CONTRACTS 

ought  never  to  be  bound  by  a  contract  to  which  he  was 
a  stranger  and  to  which  he  gave  no  consent. 

4.  Third  Persons  may  not  interfere  with  a  Contract.  — 
Although  the  formation  of  a  contract  between  two  indi- 
viduals cannot  confer  obligations  under  that  contract 
upon  a  third  party,  it  does  impose  upon  all  other  persons 
the  duty  of  non-interference  with  the  relation  thus 
established.  You  will  remember  in  the  introductory 
chapter  upon  the  subject  of  contracts,  it  was  stated  that 
the  contract  is  a  legal  relation  established  between  the 
parties.  It  is  a  thing  in  itself.  That  legal  relation, 
or  contract,  is  a  thing  of  value.  If  any  third  person 
disturbs  it  by  any  improper  means,  he  has  been  guilty 
of  a  wrong  —  he  has  interfered  with  the  property  of 
another.  If  A  is  under  contract  to  work  for  B  for  the 
space  of  one  year,  and  X  maliciously  induces  him 
to  leave  B's  employment  before  the  year  is  up,  there 
is  no  doubt  that  he  would  be  liable  in  damages.  Some 
authorities  limit  the  remedy  to  cases  where  improper 
influences,  such  as  threats,  or  violence,  or  false  state- 
ments, have  been  used.  Others  intimate  that  the  pur- 
pose must  be  the  malicious  intent  to  injure  the  plaintiff. 
The  precise  limitations  of  the  rule  may,  perhaps,  be 
somewhat  uncertain;  but,  in  general,  inducing  a  man 
to  break  his  contract  with  another  is,  under  most 
circumstances,  a  wrong  for  which  redress  may  be 
obtained  in  the  courts. 


4     CHAPTER  II 

ASSIGNMENT  OF  CONTRACTS  BY  THE  ACTS  OF  THE 
PARTIES 

1.  General  Rule  as  to  Assignment  of  Eights  and  Liabili- 
ties under  the  Contract.  —  We  have  seen  that,  with  few 
exceptions,  the  formation  of  a  contract  confers  rights  and 
liabilities  upon  those  only  who  are  parties  to  it.  But 
while  this  is  true,  one  party  to  a  contract  may,  under 
certain  circumstances,  withdraw  from  it  and  substitute 
some  one  else  in  his  place.  A  few  years  ago  this  could 
not  be  done  so  as  to  give  the  person  to  whom  the  right 
under  the  contract  was  transferred,  who  is  called  the 
assignee,  any  right  to  enforce  it.  At  the  present  time, 
however,  one  may  assign  his  rights,  though  not  his 
liabilities ;  so  that  the  assignee  may  sue  in  a  court  of 
equity,  in  case  the  other  party  to  the  contract  refuses  to 
perform ;  in  many  states  he  may  sue  in  a  court  of  law. 

To  illustrate  what  is  meant  by  the  assignment  of 
rights  and  liabilities,  suppose  A  contracts  to  sell  a  cer- 
tain quantity  of  flour  to  B  for  a  sum  of  five  hundred 
dollars.  Before  B  pays,  A  can  direct  him  to  pay  the 
money  to  X,  but  he  cannot  direct  him  to  receive  from  X 
the  flour  contracted  for.  On  the  other  hand,  B  may,  if 
he  chooses,  direct  A  to  deliver  the  flour  to  S ;  but  he 
cannot  direct  A  to  look  to  S  for  payment  of  the  price. 

Before  the  assignee  can  be  accorded  the  right  to  sue, 
however,  it  must  appear  that  he  has  given  value  for  the 

103 


104  CONTRACTS 

rights  which  were  assigned  to  him;  and  it  must  also 
appear  that  he  has  notified  the  opposite  party  to  the 
contract  that  he  has  acquired  his  rights.  The  rule 
that  no  liabilities  can  be  assigned  is  based  on  common 
sense.  If  it  were  otherwise,  you  might  be  obliged  to 
allow  a  man  to  work  for  you  with  whom  you  had  not 
contracted  and  whose  services  you  did  not  want. 

2.  Rights  which  the  Assignee  Acquires.  —  When  a  con- 
tract is  assigned,  the  assignee  steps  into  the  shoes  of  the 
original  party,  who  is  called  the  assignor.  He  acquires 
precisely  the  rights  which  the  assignor  had  —  no  more 
and  no  less.  If  you  fraudulently  induce  me  to  enter 
into  a  contract  with  you,  you  cannot  enforce  that  con- 
tract against  me.  I  have  a  right  to  go  into  a  court  of 
equity  and  have  it  annulled.  If  you  assign  your  part 
of  the  contract  to  X,  has  X  any  greater  rights  against 
me  than  you  had?  It  is  clear  that  he  has  not.  He  has 
exactly  the  same  rights  that  you  had,  and  no  more.  As 
I  was  entitled  to  avoid  the  contract  as  against  you,  I 
may  also  avoid  it  as  against  X.  You  had  nothing  but 
a  fraudulent  claim  against  me ;  X  got  an  equal  claim 
by  the  assignment.  Any  defence  that  could  have  been 
set  up  by  me  against  you,  I  now  may  set  up  against  X. 
This  is  the  universal  rule. 

3.  Necessity  for  Notice.  —  Although  the  contract  may 
have  been  assigned  in  a  perfectly  regular  manner,  the 
assignee  acquires  no  rights  under  it  until  the  other 
party  to  it  has  been  notified  of  the  assignment.  This 
rule  is  a  very  sensible  one,  otherwise  one  would  be  in 
the  position  of  not  knowing  for  whom  he  must  perform 
his  obligations.  Suppose  you  sell  me  a  farm  for  which 
I  am  to  pay  in  installments.  You  hold  a  mortgage  to 
secure  yourself,  until  I  shall  have  made  the  last  pay- 


ASSIGNMENT  OF  CONTRACT  BY  PARTIES         105 

ment.  Suppose  I  have  paid  you  part  of  the  money, 
and  then  you  assign  the  contract  to  X.  Naturally,  I 
am  looking  to  you  as  my  creditor,  and,  until  I  am  noti- 
fied to  pay  the  money  to  X,  I  would  continue  to  pay  the 
purchase  money  to  you.  X  acquires  no  right  to  have 
me  pay  the  purchase  money  to  him  until  I  am  notified 
that  I  am  to  do  so.  Consequently,  if  I  pay  another 
installment  to  you,  or  your  agent,  after  the  assignment 
has  been  made,  but  while  I  am  still  in  ignorance  of  it, 
I  am  protected.  X  cannot  collect  the  money  from  me 
the  second  time,  but  must  look  to  you  for  it. 

4.  Necessity  for  Consideration.  —  Not  only  must  the 
other  party  to  the  contract  have  been  notified  before 
he  can  be  charged,  but  it  must  also  appear  that  the 
assignee  has  given  a  valuable  consideration  for  the 
transfer  of  the  contract  rights  to  him.  If  this  were  not 
true,  assignments  of  contracts  would  be  made  for  the 
sole  purpose  of  permitting  the  second  party  to  sue  upon 
them,  when  there  was  really  no  bona  fide  sale  of  the 
contract  rights.  It  is  to  prevent  such  transactions  that 
the  rule  as  to  consideration  has  been  developed. 


CHAPTER  III 

ASSIGNMENT    OF    CONTRACTS    BY    OPERATION    OF    LAW 

1.  General  Principles.  —  Not  only  may  the  parties 
assign  contract  rights  by  their  own  acts,  but  under  cer- 
tain circumstances  the  rights,  and  also  the  liabilities, 
may  be  transferred  to  some  one  else  without  any  actual 
assignment.  Suppose  A  and  B  make  a  contract  by 
which  it  is  provided  that  B  is  to  erect  a  house  for  A. 
While  the  house  is  in  process  of  completion  A  dies; 
now,  what  is  to  be  the  result  ?  Is  B  to  be  released  from 
the  necessity  of  performing  the  remainder  of  his  con- 
tract? Or  will  he  be  compelled  to  complete  the  erection 
of  the  house  for  some  one  else  who  is  representing  the 
dead  man  ?  The  latter  is  the  case.  When  a  man  dies 
all  his  personal  property  passes,  by  operation  of  law,  to 
certain  officers,  sometimes  appointed  by  the  man  himself 
and  sometimes  by  the  court,  who  represent  him  and  are 
to  settle  up  his  estate.  These  officers  are  called  execu- 
tors if  they  are  appointed  by  the  will  of  the  deceased, 
and  administrators  if  they  are  appointed  by  the  court, 
no  executor  having  been  appointed.  Rights  under  the 
contract  are  personal  property.  They,  therefore,  pass 
to  the  representatives  of  the  decedent,  and  they  acquire 
all  his  rights  under  those  contracts.  In  the  illustration 
which  we  have  given,  the  representatives  of  A  could 
require  B  to  finish  his  contract,  and  could  hold  him 
strictly  to  account  for  any  default  therein.     These  per- 

106 


ASSIGNMENT  OF  CONTRACTS  BY  LAW  107 

8onal  representatives  are  also,  within  certain  limita- 
tions, responsible  for  all  claims  against  the  estate, 
therefore  the  liabilities  of  contracts  into  which  the 
decedent  has  entered  will  be  imposed  upon  them. 

The  same  principles  apply  if  a  man  becomes  a  bank- 
rupt, that  is,  if  he  surrenders  all  his  property  to  the 
court  to  be  distributed  among  his  creditors,  and  receives 
a  discharge  from  all  previous  liabilities.  In  such  a  case 
an  officer  is  appointed  by  the  court,  in  whose  hands  all 
the  bankrupt's  property  is  placed,  and  who  settles  up 
the  estate  and  pays  off  the  creditors.  To  this  officer, 
called  the  trustee  in  bankruptcy,  pass  all  the  rights 
under  any  contracts  into  which  the  bankrupt  may  have 
entered,  if  these  contracts  are  capable  of  assignment. 

There  are  also  certain  other  classes  where  contract 
rights  pass  from  one  person  to  another  without  any 
express  assignment  of  those  contracts.  This  class  in- 
cludes those  cases  where  the  owner  of  land  has  made  a 
contract  about  that  land  with  the  owner  of  some  contig- 
uous property,  and  where  the  agreement  thus  entered 
into  directly  benefits  the  neighboring  land,  as  where  a 
man  agrees  with  his  neighbor  not  to  build  any  house 
nearer  than  twenty  feet  to  the  street.  This  is  obviously 
a  benefit  to  his  neighbor,  in  that  it  permits  him  to  have 
better  air  and  light  than  he  otherwise  would  have.  In 
such  cases  the  rights  under  that  contract  may  pass  to 
subsequent  purchasers  of  the  adjoining  land  without 
any  express  assignment  of  the  contract  itself. 

A.  Cases  where  Liabilities  do  not  pass  by  Operation  of 
Law ;  Contracts  for  Personal  Service.  —  There  are  some 
contracts  which,  by  their  nature,  are  incapable  of  as- 
signment, such  as  one  which  calls  for  the  personal  ser- 
vices of  one  of  the  parties  to  it.    If  you  employ  a  man  to 


108  CONTRACTS 

work  for  you  by  reason  of  some  personal  quality  which 
that  man  possesses,  you  cannot  be  compelled  to  accept 
the  services  of  some  one  else,  nor  would  he  be  com- 
pelled to  work  for  any  one  except  you.  If  you  hire  X, 
who  is  a  celebrated  portrait  painter,  to  paint  your  por- 
trait, and  he  dies  before  the  completion  of  the  work,  it 
would  be  manifestly  absurd  to  suggest  that  his  personal 
representative  should  finish  the  picture,  and  then  claim 
the  price.  It  would  be  equally  impossible  for  you  to 
assign  your  contract  to  B  and  convey  any  right  to  him 
to  compel  X  to  paint  his  portrait.  All  contracts  call- 
ing for  a  personal  relation  between  the  parties  are  un- 
assignable. 

B.  Contracts  whose  Breach  involves  purely  Personal 
Injuries.  —  There  is  another  class  of  contracts  in  which 
neither  rights  nor  liabilities  will  pass  by  operation  of 
law  to  the  personal  representatives  or  to  the  trustee  in 
bankruptcy.  These  contracts  are  those  the  breach  of 
which  involves  only  a  personal  loss  to  the  party  injured, 
and  which  does  not  in  any  way  affect  the  value  of  his 
estate.  A  contract  to  marry  is  one  whose  breach  will 
never  give  rise  to  a  cause  of  action  on  the  part  of  any 
person  except  the  contracting  parties.  A  was  engaged 
to  marry  B.  B  broke  the  engagement.  A  afterward 
died.  Her  executors  sued  B  to  recover  for  breach  of 
promise.  It  was  held  that  they  could  not  recover. 
Such  a  damage  as  that  is  purely  personal  in  its  nature. 
It  does  not  either  diminish  the  estate  of  the  decedent 
nor  increase  the  estate  of  the  wrongdoer.  With  the 
exception  of  such  contracts  all  contractual  rights  and 
liabilities  pass  by  death  to  the  personal  representatives. 

C.  Cases  where  One  of  the  Parties  to  the  Contract  is  a 
Bankrupt.  —  We  have  referred  briefly  to  the  situation 


ASSIGNMENT  OF   CONTRACTS   BY   LAW  109 

where  one  party  to  a  contract  has  become  a  bankrupt. 
We  have  seen  that  as  soon  as  he  is  adjudged  a  bank- 
rupt, all  his  property  passes  at  once  to  an  officer  of 
the  court,  who  is  called  the  trustee  in  bankruptcy. 
The  rights  and  liabilities,  under  contracts  which  the 
bankrupt  may  have  entered  into,  pass  at  the  same  time 
to  the  trustee.  The  trustee,  therefore,  may  sue  on  such 
contracts,  and  is  liable  to  be  sued  by  other  contracting 
parties  who  may  have  claims  against  the  bankrupt's 
estate.  Almost  the  same  limitations  are  present  in  the 
case  of  a  bankrupt  that  we  noticed  above  in  the  case 
where  a  man  has  died.  A  trustee  cannot  sue  upon  con- 
tracts for  purely  personal  services,  nor  upon  those  the 
breach  of  which  involves  purely  personal  injuries.  The 
trustee  also  has  a  peculiar  privilege,  by  reason  of  the 
nature  of  his  office,  in  that  he  may  repudiate  unprofit- 
able contracts  within  a  certain  time  if  he  chooses  to 
do  so. 

D.  Contracts  which  pass  with  the  Sale  of  Land ;  Leasehold 
Interests. — We  briefly  referred  in  the  opening  para- 
graph of  this  chapter  to  a  class  of  cases  in  which  rights 
under  a  contract  may  pass  with  the  title  of  land  which 
has  been  sold,  when  there  has  been  no  express  assign- 
ment of  the  contract  itself.  Under  some  circumstances, 
simply  the  act  of  passing  the  title  to  land,  or  to  some 
interest  in  land,  will  carry  with  it  certain  contract 
rights,  and  sometimes  certain  contract  liabilities.  We 
will  first  discuss  the  case  in  which  we  are  dealing 
with  what  is  known  as  leasehold  interests  in  land. 
If  I  am  the  owner  of  land  and  lease  it  to  you  for  a 
period  of  twenty  years,  you  are  said  to  own  a  lease- 
hold interest.  You  may  convey  all  the  "right,  title, 
and  interest "  which  you  have  in  those  premises  to  X, 


110  CONTRACTS 

and  X  is  then  entitled  to  the  same  possession  and  priv- 
ileges to  which  you  were  entitled,  and  is  called  the 
assignee  of  the  leasehold  interest.  If,  when  I  leased 
to  you,  you  made  an  agreement  in  your  lease,  called  a 
covenant,  by  which  you  bound  yourself  to  keep  the 
house  on  the  premises  in  good  condition,  would  the 
act  of  assigning  your  leasehold  interest  to  X  carry  with 
it  the  obligation  to  repair  ?  To  use  more  technical 
language,  would  the  covenant  in  the  lease  bind  the 
assignee  ?  In  that  case  it  would,  irrespective  of 
whether  you  had  contracted  only  for  yourself  or  also 
on  behalf  of  your  assigns.  You  may  covenant  to  do 
a  certain  act,  or  you  may  covenant  that  you  and  your 
assigns  will  do  it.  In  the  case  we  have  stated  here 
it  would  make  no  difference  whether  you  named  your 
assigns  or  not;  they  would  be  bound,  and  X  would  have 
to  repair.  That  rule  is  generally  stated  thus:  Cove- 
nants in  a  lease,  which  relate  to  the  management  or 
repair  of  the  land  or  some  existing  thing  upon  the  land, 
will  bind  the  assignees  of  the  lessee,  whether  he  names 
them  in  his  covenant  or  not. 

But  suppose  you  had  covenanted  that  you  would, 
within  five  years,  build  a  new  barn,  of  a  certain  size 
and  value,  upon  a  certain  part  of  the  land.  In  that 
case  X  (supposing,  again,  that  you  had  assigned  to  him) 
could  not  be  compelled  to  carry  out  that  agreement 
unless  you  in  your  covenant  expressly  declared  that 
you  intended  to  bind  your  assignee.  That  rule  is 
usually  stated  as  follows :  A  covenant  by  a  lessee  to 
build  something,  or  to  do  something  concerning  a  thing 
not  then  in  existence,  will  bind  his  assignees  only  when 
he  expressly  names  them  in  his  covenant.  If  he  does 
they  will  be  bound,  otherwise  they  will  not  be. 


ASSIGNMENT  OF  CONTRACTS  BY  LAW  111 

These  rules  hold  good  only  in  cases  where  a  covenant 
in  the  lease  relates  explicitly  to  the  land  or  to  some- 
thing on  the  land.  If  you  had  made  a  covenant  in  the 
lease  by  which  you  had  personally  bound  yourself  to  do 
or  not  to  do  some  particular  thing  not  relating  to  the 
land  itself,  then  your  covenant  could  not  bind  your 
assignee.  If,  in  the  same  illustration,  you  had  cov- 
enanted that,  in  consideration  of  the  lease  to  you, 
you  would  never  keep  sheep  upon  the  premises,  the 
covenant  would  probably  not  bind  your  assignee  under 
any  circumstances,  because  it  would  be  construed  to  be 
a  personal  covenant  not  concerning  the  land  or  its  use. 
Therefore,  it  is  said,  if  the  covenant  be  of  a  purely 
personal  nature,  it  will  not  bind  the  assignees  even 
if  named. 

E.  Covenants  in  Deeds  conveying  an  Absolute  Title  to 
Land;  at  Law. — Having  briefly  examined  the  rules 
relating  to  covenants  in  leases,  we  will  now  discuss  the 
situation  where  there  has  been  a  covenant  in  a  deed, 
which  conveys  an  absolute  or,  as  it  is  called,  a  "fee 
simple  "  interest.  Suppose  I  sell  you  a  piece  of  land 
adjoining  mine,  and  upon  my  land  there  is  a  dam  so 
situated  that  the  water  which  it  intercepts  flows  over 
your  land  and  forms  a  mill-pond.  You  are  the  owner 
of  a  mill,  which  depends  for  its  water  supply  upon  the 
pond  thus  created.  When  I  sell  you  the  land  with  the 
mill,  I  make  a  covenant  in  the  deed  by  which  I  convey 
the  premises  to  you,  that  I  will  keep  the  dam  in  re- 
pair. If  you  sell  your  land  to  A,  could  A  force  me  to 
keep  the  dam  in  repair?  In  other  words,  would  the 
benefit  of  the  covenant  which  I  made  with  you  pass  to 
A  when  he  purchased  the  land?  In  this  case  it  would. 
The  covenant  was  manifestly  made  for  the  benefit  of  the 


112  CONTRACTS 

man  who  owned  the  adjoining  premises,  including  the 
mill.  Therefore,  whoever  buys  the  premises  is  entitled 
to  the  benefit  of  the  covenant  which  I  made. 

But  if  I  sell  my  land  to  X,  could  you  force  X  to  keep 
the  dam  in  repair  ?  Perhaps  I  sold  to  X  not  mention- 
ing the  fact  that  I  was  under  an  obligation  to  repair  the 
dam.  Would  it  be  fair  to  permit  you  now  to  place 
upon  X  the  burden  of  performing  a  covenant  of  which 
he  may  have  had  no  notice?  It  seems  reasonable  to 
conclude  that  it  would  not.  The  benefit  of  a  cove- 
nant will  pass  to  all  subsequent  purchasers  of  the  land 
for  the  benefit  of  which  it  was  made ;  speaking  techni- 
cally, it  will  "run  with  the  land,"  but  the  "burden"  of 
a  covenant,  that  is,  the  obligation  to  perform  (in  this 
case,  the  obligation  to  repair  the  dam),  will  not  pass 
with  the  land  to  the  subsequent  purchasers.  This  is 
the  rule  in  courts  of  law. 

F.  Eule  in  Equity ;  Restrictive  Covenants.  —  The  rule 
as  above  stated  is  also  the  rule  in  equity  when  the  cove- 
nant is  one  similar  to  that  given  in  our  illustration. 
A  covenant  to  perform  an  active  duty  will  not,  under 
any  circumstances,  bind  the  purchaser  of  the  land. 
Under  certain  conditions,  however,  covenants  not  to  do 
certain  specified  acts  will  bind  the  subsequent  pur- 
chasers. Suppose  I  am  the  owner  of  a  large  tract  of 
land  which  I  have  laid  out  in  city  lots.  I  form  a  plan 
by  which  it  is  provided  that  no  house  shall  be  built 
nearer  than  twenty  feet  to  the  street  upon  which  it  is 
situated.  There  is  a  stipulation  in  the  deed  by  which 
I  convey  one  of  these  lots  to  you  that  you  shall  not 
erect  a  house  within  twenty  feet  of  the  street.  You, 
of  course,  cannot  erect  a  house  within  that  distance, 
but  could  one  who  purchased  from  you  do  so?     This 


ASSIGNMENT  OF   CONTRACTS   BY   LAW  113 

brings  us  again  to  the  original  question,  whether  the 
burden  of  the  covenant  will  run  with  the  land.  In  this 
case,  you  will  notice,  the  covenant  is  not  an  agreement 
to  do  an  act,  it  is  an  agreement  to  refrain  from  doing  an 
act.  If  the  subsequent  purchaser  of  the  land  was  noti- 
fied that  such  an  agreement  had  been  made  by  yourself, 
he  will  not  be  permitted  to  break  the  terms  of  that  cove- 
nant. A  covenant  like  this  is  known  as  a  restrictive 
covenant,  and  will  always  be  enforced  by  a  court  of 
equity  as  against  subsequent  purchasers  of  the  land,  if 
they  were  notified  of  its  existence.  The  foregoing 
are  all  examples  of  cases  where  contract  rights  are 
transferred  from  one  party  to  another  without  any 
express  assignment. 


SECTION  III 
INTERPRETATION  OF  CONTRACTS 


CHAPTER   I 

GENERAL  RULES  FOR  INTERPRETATION  OF  CONTRACTS 

1.  Literal  Meaning  of  Words  to  be  Followed.  — We  have 
now  seen  how  the  contract  may  be  created  and  what 
parties  it  may  affect,  and  we  now  ask,  How  shall  we 
interpret  it?  We  will  suppose  that  the  parties  have 
fallen  into  a  dispute  over  their  contract,  and  are  now  in 
court.  The  question  is,  What  does  the  contract  mean  ? 
One  party  thinks  it  means  one  thing  :  the  other  thinks 
it  means  something  else.  We  will  suppose  the  con- 
tract to  be  either  written  or  oral,  but  that  its  terms 
have  been  clearly  proven,  and  the  one  question  is, 
What  do  those  terms  mean  ?  The  first  rule  of  inter- 
pretation is,  if  the  words  are  clear  in  meaning,  that 
meaning  must  be  taken  literally.  If  you  have  plainly 
said  one  thing,  you  will  not  be  allowed  to  contend 
that  you  meant  something  else.  Your  words  may  have 
a  legal  significance  of  which  you  were  ignorant,  but 
that  is  your  misfortune,  and  you  cannot  offer  it  as  an 
excuse  for  interpreting  the  contract  in  some  other  way. 
If  there  is  a  clear  mistake  in  grammar,  or  if  there  has 

114 


GENERAL  RULES  FOR  INTERPRETATION  115 

been  an  omission  of  some  word  in  a  written  contract, 
which  plainly  was  a  mere  inadvertence,  then  perhaps 
the  contract  may  be  corrected  or  explained.  But  the 
error  in  such  a  case  must  be  perfectly  plain.  There 
must  be  no  doubt  as  to  the  real  intention  of  the  parties. 
The  point  here  to  be  insisted  upon  is  that  where  the 
words  are  clear  they  must  be  taken  to  mean  exactly 
what  they  say. 

2.  Intention  of  Parties  to  be  Deduced  from  the  Whole 
Agreement.  —  Keeping  in  mind  the  rule  that  the  words, 
if  plain,  must  be  taken  to  mean  only  what  they  clearly 
indicate,  it  should  yet  be  understood  that  the  whole 
agreement  will  be  considered  by  the  court  and  inter- 
preted as  one  complete  contract;  it  will  not  take  one 
sentence  or  group  of  sentences  and  give  effect  to  that 
part  of  the  agreement,  when  its  meaning  is  clearly 
inconsistent  with  another  part  of  it.  If,  after  consid- 
ering all  its  terms,  the  court  is  able  to  deduce  from  the 
contract  the  real  intention  of  the  parties,  it  will  do  so 
even  though  it  may,  in  one  sense,  do  violence  to  the 
apparent  meaning  of  some  particular  clause.  If  the 
contract  be  made  subject  to  a  term  understood  by  both 
parties  to  be  introduced  into  it,  although,  perhaps, 
not  expressed  upon  its  face,  that  will  be  taken  into 
consideration. 

Moreover,  if  a  contract  is  made  in  a  country  where  a 
peculiar  custom  or  usage  is  known  to  be  in  force,  it 
is  understood  to  be  made  subject  to  this  custom  or 
usage.  Where  a  contract  of  services  was  entered  into 
by  a  drummer  or  traveling  salesman,  by  which  he  un- 
conditionally agreed  to  work  for  a  mercantile  house 
during  a  specified  term  of  years,  he  gave  three  months' 
notice,  and  ended  his  relations  with  his  employers. 


116  CONTRACTS 

When  he  was  sued  for  damages,  he  contended  that 
there  was  a  custom  which  permitted  a  drummer  to  ter- 
minate his  term  of  service  by  giving  three  months' 
notice,  and  that  this  contract  was  made  where  that 
custom  was  in  force,  and  therefore  was  subject  to  its 
terms.  The  court  sustained  this  argument.  The  in- 
tention of  the  parties,  as  collected  from  all  the  circum- 
stances, must  have  been  to  make  the  custom  a  part  of  the 
contract,  inasmuch  as  it  was  a  usage  in  that  locality  and 
had  not  been  expressly  excepted.  In  the  same  way,  if 
the  parties  have  stipulated  that  a  thing  be  done  within 
a  certain  time,  as  we  have  already  seen,  the  court  will 
carefully  survey  the  whole  agreement  to  see  if  the 
intention  of  the  parties  contemplated  making  the  stipu- 
lation as  to  time  an  essential  element  of  the  contract, 
and  will  enforce  it  accordingly. 

A.  Distinction  between  Penalty  and  Liquidated  Damages. 
—  As  an  example  of  the  rule  that  the  court  will  exam- 
ine the  entire  agreement  and  endeavor  to  collect  there- 
from the  intention  of  the  parties,  we  may  here  refer  to 
the  interpretation  of  contracts  providing  for  the  payment 
of  a  fixed  sum  by  either  party  who  has  been  guilty  of  a 
breach.  The  question  involved  in  such  cases  is  whether 
the  fixed  sum  was  intended  by  the  parties  to  be  a  pen- 
alty or  to  be  what  are  known  as  "liquidated  damages." 

Suppose  you  have  agreed  to  build  me  a  house  and  to 
complete  the  work  by  June  1,  1900,  which  you  fail  to 
do.  In  the  contract  is  a  clause  providing  that  for  every 
day  beyond  June  1  during  which  the  house  remains 
uncompleted,  you  are  to  pay  me  one  hundred  dollars. 
Now,  it  becomes  very  important  to  determine  whether 
we  intended  this  one  hundred  dollars  to  be  paid  by  you 
as  a  penalty  for  your  failure  to  complete  the  work  within 


GENERAL  RULES  FOR  INTERPRETATION  117 

the  stipulated  time,  or  whether  we  intended  it  to  rep- 
resent the  amount  of  damages  I  would  sustain  by  the 
delay,  and  for  it  to  be  paid  to  me  as  such.  If  it  is 
construed  to  be  a  penalty,  then,  when  I  sue  you,  I  can 
recover  nothing  but  my  actual  loss,  which  would  be 
proven  by  me  and  determined  by  a  jury.  But  if  the 
one  hundred  dollars  per  day  is  construed  to  be  liqui- 
dated damages,  then  I  may  recover  the  entire  amount, 
regardless  of  the  extent  of  my  actual  loss. 

We  may  have  expressly  stated  in  the  contract  that 
the  sum  to  be  recovered  is  to  be  considered  liquidated 
damages,  but  the  court  will  pay  no  attention  to  that. 
It  will  look  at  the  whole  agreement  to  see  what  it 
really  is,  regardless  of  what  you  or  I  may  have  said  it 
is.  This  may  seem  to  be  disregarding  a  term  in 
the  contract;  but  it  is  not,  in  reality.  The  parties, 
you  and  I,  have  made  an  agreement.  The  sum  named 
for  recovery  is  either  a  penalty  or  liquidated  damages ; 
that  is  a  legal  question.  I  cannot  make  a  penalty 
liquidated  damages  by  saying  so,  any  more  than  I  can 
make  an  instrument  a  sealed  contract  by  simply  insert- 
ing a  clause  saying  that  it  is  sealed  when  it  is  not.  The 
court  is  the  one  to  determine  whether  the  provision  for 
the  payment  of  the  one  hundred  dollars  per  day  is 
a  stipulation  for  a  penalty  or  for  liquidated  damages. 

There  are  one  or  two  rules  which  are  universally 
followed  in  arriving  at  this  conclusion.  If  the  amount 
stipulated  to  be  paid  on  breach  of  the  contract  is  to 
compensate  for  a  loss,  uncertain  in  amount,  and 
which  it  is  impossible  to  ascertain  in  advance,  then 
the  sum  is  liquidated  damages.  In  the  illustration 
above,  where  the  one  hundred  dollars  per  day  was 
to  be  paid  for  delay  in  finishing  the  house,  that  one 


118  CONTRACTS 

hundred  dollars  per  day  would  be  recoverable  as 
liquidated  damages.  There  you  see  the  amount  of 
loss  is  uncertain.  If  the  amount  stipulated  for  is 
to  compensate  for  a  loss  which  is  certain  and  defi- 
nite in  amount,  and  the  amount  recoverable  is  greater 
than  the  loss,  it  is  a  penalty.  Suppose  I  give  you  a 
bond  by  which  I  obligate  myself  to  pay  you  one  thou- 
sand dollars  on  April  1,  1902,  if,  prior  to  that  date,  I 
have  not  paid  you  a  debt  of  five  hundred  dollars.  There 
you  see  the  loss  is  definite  and  certain  —  five  hundred 
dollars.  The  sum  recoverable  is  more  than  the  loss. 
This  is  a  penalty,  and  not  liquidated  damages;  accord- 
ingly, you  can  recover  only  your  five  hundred  dollars 
and  any  actual  loss  you  may  have  sustained.  You 
cannot  recover  the  entire  one  thousand  dollars  unless 
your  actual  loss  has  amounted  to  five  hundred  dollars, 
In  some  cases  there  may  be  several  terms  to  the  contract. 
The  breach  of  some  would  involve  a  certain  loss ;  the 
breach  of  others  would  involve  an  uncertain  loss.  In 
such  a  case  the  party  bound  is  given  the  benefit  of  the 
doubt,  and  the  sum  provided  for  is  considered  to  be  a 
penalty. 


CHAPTER  II 

EXPLANATION  AND  ALTERATION  OF  WRITTEN 
CONTRACTS 

1.  Advantages  of  Written  over  Oral  Contracts.  —  It  is 
always  safer  for  one  to  put  his  contracts  into  writing. 
You  and  I  may  agree  to-day  as  to  a  matter  about  which 
we  are  making  a  bargain.  To-morrow  you  may  re- 
member it  one  way,  and  I  another.  Each  of  us  will 
probably  remember  the  terms  in  the  way  most  favorable 
to  himself.  In  reducing  the  terms  of  a  contract  to 
writing,  be  sure  that  you  are  clear  in  your  mind  as 
to  all  the  details,  and  then  omit  nothing.  This  point 
should  be  emphasized,  for  if  you  put  down  only  the 
principal  points,  and  trust  to  memory  to  fill  in  the 
rest,  the  writing  will  be  of  little  use ;  because  if  oral 
evidence  must  be  brought  in  to  explain  some  terms 
of  the  contract,  the  court  will  permit  all  of  them  to 
be  thus  explained,  and  the  writing  is  disregarded. 
But  written  evidence  is  the  best  evidence,  and  unless 
it  appears  that  some  term  of  the  contract  has  been 
omitted  from  the  written  instrument,  neither  party 
will  be  allowed  to  give  oral  evidence.  That  is  why  you 
should  be  careful  to  put  everything  down.  As  soon  as 
the  court  allows  oral  evidence  to  be  brought  in,  you 
might  as  well  throw  away  your  written  contract, 
because  you  are  in  reality  relying  upon  your  memory, 
after  all. 

119 


120  CONTRACTS 

2.  No  Oral  Evidence  will  be  Admitted  by  the  Court  to 
contradict  or  vary  the  Terms  of  a  Written  Contract.  —  Now, 
we  will  assume  that  we  have  made  a  written  contract, 
and,  a  dispute  having  arisen  concerning  it,  we  come 
into  court  about  it.  You  wish  to  prove  the  contract. 
The  first  thing  you  have  to  do  is  to  prove  that  this 
writing  is  the  contract  between  you  and  me.  If  our 
contract  is  sealed,  you  prove  that  I  sealed  and  delivered 
it  to  you.  If  it  is  not  sealed,  but  "parole,"  you  prove 
that  I  am  the  party  who  signed.  The  most  common 
way  to  prove  that  would  be  to  prove  the  signature  to 
be  mine.  Having  established  the  fact  that  the  paper 
here  in  court  contains  the  written  evidence  of  the  con- 
tract between  you  and  me,  the  court  will  say:  "Let 
us  see  the  writing,  to  determine  what  the  contract  in 
fact  is."  Then  if  I  want  to  go  on  the  stand  and  testify 
as  to  what  we  agreed  upon,  the  court  would  say :  "  No, 
you  have  deliberately  reduced  the  terms  of  your  contract 
to  writing.  Now  you  must  abide  by  what  }tou  have 
written."  In  other  words,  it  is  a  general  rule  that  no 
oral  evidence  will  be  allowed  to  vary  or  contradict  the 
terms  of  a  written  contract. 

A.  Oral  Evidence  to  affect  the  Validity  of  a  Written 
Contract.  —  Although  I  ma}'  not  go  upon  the  stand  to 
testify  as  to  the  terms  of  a  written  contract  which  is 
before  the  court,  I  may  testify  concerning  the  contract 
if  my  purpose  is  not  in  any  way  to  vary  or  contradict 
its  terms,  but  is  to  question  its  validity.  Suppose  I 
want  to  testify  that  the  contract  was  signed  under  the 
fear  of  violence,  or  under  a  mistake  as  to  its  nature,  or 
that  I  was  deceived  by  fraudulent  misrepresentations 
—  in  all  these  cases  I  am  offering  evidence  not  as  to 
the  terms  of  the  contract,  but  as  to  its  validity.     That 


EXPLANATION  AND  ALTERATION  OF  CONTRACTS    121 

may  be  done,  otherwise  one  would  be  powerless  to  attack 
the  validity  of  a  written  contract  into  which  he  had 
entered  against  his  will,  or  under  a  mistaken  impression 
as  to  the  instrument  he  was  signing. 

B.  When  Part  of  the  Contract  is  Omitted.  —  If,  as  before 
pointed  out,  the  parties,  in  writing  their  contract,  forget 
to  insert  some  important  provision  of  it,  oral  evidence 
may  be  brought  in  to  show  what  the  omitted  term  was. 
The  practical  effect  of  such  an  omission  is  to  destroy 
the  advantages  to  be  gained  by  writing  the  contract. 
Once  open  the  door  to  oral  evidence  and  the  written 
agreement  is  of  little  practical  benefit.  In  order  to 
bring  in  oral  evidence  as  to  a  missing  term,  the  party 
who  wishes  to  do  so  must  first  conclusively  prove  to 
the  satisfaction  of  the  court  that  some  term  has  been 
omitted  from  the  writing.  Until  he  does  that,  he  is 
not  at  liberty  to  testify  at  all. 

C.  Oral  Evidence  to  explain  Written  Terms.  —  Although 
you  can  never  contradict  the  terms  of  a  written  instru- 
ment by  oral  evidence,  you  may,  nevertheless,  explain 
these  terms  if  they  are  not  clear.  A  contract  may  con- 
tain technical  language  which  must  be  explained  before 
the  jury  can  understand  what  is  meant.  Sometimes 
the  words  will  admit  of  two  meanings,  and  then  oral 
evidence  may  be  brought  in  to  show  which  one  the 
parties  really  intended.  Again,  the  words  may  be  of 
such  a  nature  that  it  is  almost  impossible  to  tell  what 
they  mean  without  some  further  explanation. 

A  and  B  made  an  agreement  in  writing,  by  which  A 
promised  to  sell  wool  to  B.  The  only  words  in  the 
contract  which  in  any  way  described  the  wool  was  a 
clause  in  B's  agreement  wherein  he  described  it  as 
"your  wool,"  meaning  A's.     The  court  allowed  oral 


122  CONTRACTS 

evidence  to  be  brought  in  to  show  what  B  meant  by 
"your  wool."  In  the  same  way  technical  terms  may  be 
explained.  A  vessel  being  insured  is  impliedly  war- 
ranted to  be  sea- worthy;  oral  evidence  may  be  brought  in 
to  show  what  is  meant  by  sea-worthy,  or,  as  was  done  in 
one  case,  to  show  that  in  the  particular  contract  under 
discussion  the  parties  had  a  different  meaning  from  the 
one  usually  attached  to  the  word.  Ambiguity  may 
always  be  explained  away;  but  if  the  language  be  abso- 
lutely unmeaning,  oral  evidence  will  not  be  allowed  to 
create  a  meaning  where  there  was  none  before,  for  this 
would  be  adding  to  a  written  contract  by  oral  evidence. 
D.  Oral  Evidence  to  show  the  Existence  of  a  Custom 
affecting  the  Contract.  —  We  have  referred  to  the  fact 
that  if  a  written  contract,  embodying  an  agreement 
between  two  parties,  be  made  in  a  place  subject  to  a 
particular  custom  or  usage,  that  custom  or  usage  be- 
comes a  term  of  the  contract.  If  the  custom  or  usage 
be  not  mentioned  in  the  agreement,  and  one  of  the 
parties  wishes  to  prove  it  by  oral  evidence,  it  may  per- 
haps be  objected  that  to  allow  him  to  do  so  would  be  to 
add  to  a  written  contract  by  oral  evidence.  This, 
however,  is  not  correct.  As  a  matter  of  law,  the 
custom  or  usage  is  already  a  part  of  the  contract.  To 
permit  oral  evidence  to  explain  what  a  custom  is,  is 
merely  to  prove  an  omitted  term.  A  case  where  a  cus- 
tom or  usage  becomes  a  part  of  the  contract  would  be 
where  a  tenant  rents  a  farm  for  a  year,  dating  his  lease 
January  1.  Oral  evidence  would  be  admissible  in  such 
a  case,  to  prove  that  there  was  a  custom  which  permitted 
the  tenant  to  return  to  the  farm  after  his  lease  has 
expired,  and  reap  the  wheat  which  he  had  sown  the 
preceding  autumn. 


EXPLANATION  AND  ALTERATION  OF  CONTRACTS  123 

E.  Admission  of  Oral  Evidence  in  Equity.  —  When  you 
come  into  a  court  of  equity  and  ask  it  to  force  the  oppo- 
site party  specifically  to  perform  his  contract,  much 
more  freedom  in  the  admission  of  oral  evidence  is 
allowed.  Courts  of  equity  offer  many  remedies  which 
a  court  of  law  cannot,  and  in  applying  these  remedies 
they  exercise  a  large  amount  of  discretion.  If  you 
come  into  equity  and  ask  the  judges  to  force  me  to  carry 
out  my  contract  with  you,  they  will  carefully  go  over 
the  ground  to  see  if  you  have  been  guilty  of  any  wrong- 
doing or  if  there  is  any  conscientious  reason  why  I 
should  not  be  compelled  to  carry  out  my  agreement. 
The  court  may,  in  its  discretion,  either  grant  the  remedy 
or  not,  as  it  thinks  best,  and  is  not  bound  by  rigid  legal 
rules.  Therefore,  to  see  if,  on  the  whole,  the  remedy 
should  be  granted,  the  court  of  equity  will  often  allow 
oral  evidence  when  a  court  of  law  would  not.  A  made 
a  written  contract  to  buy  B's  house  and  park.  B  was 
seeking  specific  performance.  A  was  allowed  to  show, 
orally,  that  he  had  misjudged  the  boundaries  of  the  park, 
and  thought  it  contained  some  valuable  trees,  which  it 
did  not.     The  court  refused  to  carry  out  the  contract. 

3.  Alteration  of  Written  Contracts.  —  Having  briefly 
discussed  the  interpretation  of  written  contracts,  there 
remains  to  be  said  a  word  about  the  alteration  of  con- 
tracts which  have  been  made  in  writing.  If  both  parties 
are  willing,  the  terms  of  a  written  contract  may  be 
altered  at  any  time.  This  may  be  done  by  oral  agree- 
ment or  by  actually  changing  the  writing,  remember- 
ing, however,  that  in  cases  where  the  original  contract 
must  be  written,  by  virtue  of  the  statute  of  frauds, 
the  alteration  must  be  written  also.  If  the  original 
instrument  to  be  valid  must  be  under  seal,  then  the 


124  CONTRACTS 

alteration  must  be  under  seal  also.  These  rules  apply 
because  the  effect  of  altering  a  contract  is  practically 
the  same  thing  as  making  a  new  one.  It  follows  that 
in  all  cases,  if  the  alteration  be  not  under  seal,  there 
must  be  a  consideration  for  it,  or  it  is  void,  being  a 
gratuitous  promise.  This  consideration  is  usually  a 
change  in  the  contract  price  of  the  work  done,  etc. 
When  there  is  a  clause  in  the  original  contract  provid- 
ing for  alterations  without  a  new  consideration,  the 
alterations  are  really  founded  on  the  old  consideration, 
and  nothing  more  is  necessary.  It  is  always  better  to 
insert  some  kind  of  provision  as  to  alterations  in  the 
original  contract.  This  will  prevent  disputes  when  the 
need  for  alteration  arises,  as  it  does  arise  in  nine  cases 
out  of  ten  where  the  contract  is  a  building  contract. 
The  alterations  referred  to  here  are  those  made  after 
the  original  contract  has  been  executed.  If  at  the  time 
the  parties  are  negotiating,  they  find  it  necessary  to 
erase  or  alter  the  terms  of  the  paper  which  they  are 
about  to  sign,  it  is  customary  to  place  a  note  on  the 
margin,  which  calls  attention  to  the  fact  that  the  alter- 
ation was  made  before  the  paper  was  signed. 


SECTION  IV 
DISCHARGE  OF  CONTRACTS 


CHAPTER   I 

DISCHARGE  BY  AGREEMENT 

1.  Mutual  Release.  —  Having  discussed  the  manner 
in  which  a  contract  may  be  created,  whom  it  affects, 
and  how  it  may  be  interpreted,  we  now  come  to  the 
question,  How  may  this  relation  be  discharged?  How 
may  the  tie  which  binds  the  parties  be  unloosed?  If 
two  parties  have  entered  into  a  contract  by  which  they 
mutually  bind  themselves  to  do  certain  acts,  it  follows 
as  a  matter  of  common  sense  that,  if  they  both  agree, 
they  may  release  each  other  from  their  respective  obli- 
gations. As  individuals  may  freely  enter  into  contract 
relations  with  other  individuals,  it  is  obvious  that  by 
consent  of  all  parties,  they  may  just  as  freely  retire  from 
such  obligations. 

If  neither  party  has  performed  his  part  of  the  con- 
tract, that  is,  if  it  is  an  "executory"  contract,  nothing 
is  necessary  to  discharge  it  except  the  mutual  con- 
sent of  those  bound  under  it.  In  such  a  case  the 
surrender  of  the  rights  of  one  is  the  consideration  for 
the  surrender  of  the  rights  of  the  other.     If,  however, 

125 


126  CONTRACTS 

one  party  has  performed  his  part  of  the  agreement,  he 
has  acquired  an  absolute  right  to  have  the  opposite 
party  perform  his  part.  If  he  waives  that  right  and 
agrees  to  release  the  other  party,  this  agreement  must 
be  under  seal  or  must  be  supported  by  a  consideration, 
otherwise  it  will  not  be  binding.  The  parties,  if  they 
choose,  instead  of  merely  releasing  one  another  from 
their  obligations,  may  substitute  a  new  agreement  for 
the  old,  or  may  so  alter  the  terms  of  the  old  agreement 
that  a  new  one  is  practically  made.  In  such  cases  the 
old  contract  is  absolutely  discharged. 

If  two  parties  are  endeavoring  to  discharge  a  con- 
tract by  mutual  consent  or  by  the  substitution  of  a 
new  agreement,  they  should  do  it  in  the  same  manner 
in  which  the  original  contract  was  made.  If  the 
original  contract  is  in  writing,  the  discharge  also 
should  be  in  writing ;  if  it  is  under  seal,  the  discharge 
should  be  under  seal.  This  arises  from  the  general 
rule  that  an  instrument  may  not  be  discharged  or 
altered  by  another  instrument  less  solemn  than  itself. 

Sometimes  the  contract  itself  contains  provisions  by 
which  it  is  to  be  discharged  upon  the  happening  of 
certain  conditions.  Suppose  a  common  carrier,  i.e. 
one  who  carries  goods  for  hire,  agrees  to  carry  your 
goods  safely  from  Liverpool  to  New  York,  "dangers 
of  fire  and  sea  excepted."  If  the  vessel  is  wrecked 
at  sea,  or  burns,  the  contract  is  at  an  end.  Again, 
suppose  a  contract  of  service  contains  a  stipulation 
that  either  party  may  terminate  it  by  a  month's 
notice.  An  exercise  of  the  option  would,  obviously, 
put  an  end  to  the  contractual  relation. 


CHAPTER  II 

DISCHARGE  BY  PERFORMANCE 

1.  Payment  and  Tender.  —  The  second  way  in  which 
the  contractual  tie  may  be  loosened  and  the  parties 
returned  to  their  original  position,  is  by  performance. 
If  you  and  I  have  entered  into  a  contract  by  which  we 
have  mutually  agreed  to  perform  certain  acts,  and  we 
have  both  completely  performed  those  acts,  then  the 
contract  comes  to  an  end,  because  there  is  no  longer  any 
reason  for  it  to  exist,  its  purpose  having  been  accom- 
plished. If  you  were  under  an  obligation  to  pay  me 
one  hundred  dollars  and  have  paid  the  money,  it  is 
perfectly  clear  that  I  no  longer  have  any  rights  against 
you  under  the  contract.  If  I  sue  you,  you  may  plead 
"payment,"  and  of  course  I  cannot  recover.  If  you 
offer  to  pay  and  I  refuse  to  accept,  you  have  made  what 
is  known  as  a  "tender."  If  the  defendant  proves  "ten- 
der," he  does  not  thereby  excuse  himself  from  paying 
the  amount  of  the  debt,  but  he  does  excuse  himself  from 
the  payment  of  any  costs  of  the  suit,  or  interest,  or 
damages  for  delay. 

2.  Promissory  Notes  in  Conditional  Payment.  —  If  one 
party  to  the  contract  discharges  his  obligation,  not  by 
the  payment  of  money,  but  by  giving  a  promissory  note 
for  the  amount,  the  payment  is  said  to  be  conditional. 
The  promissory  note,  as  you  will  learn  when  you  take 
up  the  part  of  this  book  relating  to  negotiable  paper,  is 

127 


128  CONTRACTS 

of  value  in  itself,  and,  therefore,  the  contract  is  dis- 
charged by  giving  a  promissory  note  instead  of  money. 
But  its  discharge  is  conditional  upon  the  promissory 
note  being  paid  at  maturity.  If  it  is  not  paid  when  it 
becomes  due,  then  the  original  contract  revives  and 
again  becomes  in  full  force,  so  that  one  party  may  sue 
the  other  upon  it  if  he  chooses  to  do  so,  instead  of 
trying  to  collect  the  note. 


CHAPTER  III 

DISCHARGE    BY  BREACH 

1.  The  Broken  Term  must  be  an  Essential  Element  of 
the  Contract.  —  We  have  endeavored  to  make  it  clear 
that  a  contract  is  a  relation  which  exists  between  two 
or  more  individuals.  That  relation  may  be  thought 
of  as  involving  a  tension  between  them.  They  may 
be  considered  as  being  bound  together  by  contractual 
cords.  If  these  cords  are  untied  by  mutual  consent 
of  the  parties,  the  contract  is  at  an  end,  because  the 
tension  is  destroyed.  We  have  seen,  also,  that  if  they 
have  served  their  purpose,  then  the  tension  is  relieved, 
because  it  has  done  what  it  was  intended  to  do.  In  the 
same  way,  if  one  party  has  broken  some  essential  part 
of  the  contract,  that  will  destroy  the  tension  and,  there- 
fore, destroy  the  contractual  relations  just  as  completely 
as  any  of  the  other  methods.  If  one  party,  therefore, 
has  failed  to  perform  his  part,  or  has  done  some  act 
which  clearly  amounts  to  a  breach  of  the  contract,  the 
relation  being  absolutely  destroyed,  no  more  rights  can 
then  be  claimed  or  upheld  under  it. 

The  injured  party  has,  it  is  true,  a  right  against  the 
other,  but  it  is  not  a  contractual  right;  it  is  a  claim  for 
damages.  In  such  a  case  the  question  always  arises 
whether  the  default  of  the  defendant,  admitting  there 
has  been  one,  is  of  such  a  nature  as  completely  to  dis- 

129 


130  CONTRACTS 

charge  the  contract;  also,  whether  he  has  broken  an 
integral  term  of  it  or  only  a  collateral  agreement  or 
warranty.  We  have. already  discussed  the  distinction 
between  a  representation  or  agreement  which  is  an 
integral  part  of  the  contract,  and  one  which  is  only 
collateral  to  it.  In  the  one  case,  the  failure  to  make 
good  the  representation,  or  to  perform  the  agreement, 
will  discharge  the  contract  so  as  to  free  the  other 
party  from  all  duties  on  his  part.  In  the  other  case, 
while  this  failure  may  give  rise  to  an  action  for  dam- 
ages, it  will  not  discharge  the  contract  itself. 

2.  Breaches  of  Divisible  Contracts.  —  We  must  not 
only  examine  carefully  the  default  of  the  party  to  see 
whether  he  has  broken  an  integral  term  of  the  contract, 
but  we  must  also  examine  the  contract  itself  to  see 
whether  the  breach  affects  the  whole  of  it.  Is  it  a 
breach  which  will  destroy  the  entire  contract  or  only  a 
part  of  it?  Sometimes  a  contract  is  entered  into  in 
such  a  manner  that  it  really  consists  of  a  number  of 
separate  agreements.  The  question  then  arises  whether 
a  breach  of  one  of  these  agreements  will  destroy  the 
entire  contract,  or  whether  it  will  destroy  only  that  part 
which  it  affects.  A  agreed  to  sell  B  eight  thousand 
tons  of  iron,  to  be  delivered  in  twelve  monthly  install- 
ments ;  B  was  to  send  wagons  to  receive  it.  He  failed 
to  send  enough  wagons  the  first  month.  The  question 
was,  whether  the  contract  was  really  a  series  of  twelve 
contracts,  one  for  each  month,  so  that  a  breach  of  one 
would  have  no  effect  on  the  others,  or  whether  it  was 
to  be  considered  as  one  single  contract,  so  that  the  fail- 
ure to  provide  wagons  would  operate  as  a  discharge  of 
the  whole  contract.  In  this  case  it  was  held  that  the 
failure  by  the  plaintiff  to  perform  his  part  in  one  month 


DISCHARGE   BY   BREACH  131 

did  not  affect  the  other  parts  of  the  contract  —  he  could 
enforce  the  delivery  in  the  other  months.  This  is 
what  is  known  as  a  divisible  contract.  This  decision 
is  a  very  close  one.  There  are  cases  nearly  similar 
which  have  been  decided  contrary  to  it.  If  the  court  is 
of  the  opinion  that  the  parties  really  intended  a  series 
of  agreements  to  constitute  only  one  contract,  then  a 
breach  of  one  of  the  parts  will  destroy  the  whole ;  other- 
wise the  decision  will  be  as  in  the  illustration  which 
we  have  discussed. 

3.  Breach  by  Renunciation.  —  We  now  assume  that 
the  contract  is  entire  or  single,  and  that  the  condi- 
tion violated  is  an  essential  part  of  the  agreement. 
One  of  the  ways  in  which  a  breach  of  such  a  condition 
may  be  brought  about  is  by  a  renunciation  of  the  con- 
tract. If  one  party  distinctly  declares  his  determina- 
tion to  go  no  further  with  it,  this  frees  the  opposite 
party  from  all  obligation  to  perform  his  part  under  it, 
and  gives  him  at  once  a  right  of  action  for  damages 
against  the  party  so  renouncing.  He  has  this  right  of 
action,  whether  the  renunciation  was  made  before  or 
after  the  time  when  the  contract  was  to  have  been 
performed. 

It  was  thought  at  one  time  that  a  breach  occurring 
before  the  time  when  the  contract  was  to  be  performed 
would  give  the  opposite  party  no  right  of  action.  It  was 
thought  the  breach  could  not  be  complete  until  the  time 
had  come  when  the  other  party  was  expecting  the  promise 
to  be  fulfilled,  and  he  had  been  disappointed.  This 
is  no  longer  the  view  of  the  courts.  If  one  party  dis- 
tinctly declares  that  he  will  not  perform  the  contract, 
this  operates  as  a  complete  breach.  A,  who  was  a  lec- 
turer, hired  B  to  go  with  him  on  a  tour  to  act  as 


132  CONTRACTS 

courier.  The  term  of  service  was  to  begin  on  June  1. 
On  May  11,  A  wrote  to  B,  saying  he  had  decided  not  to 
take  him  with  him.  B  at  once  began  an  action  for 
breach  of  contract,  and  it  was  held  that  he  was  entitled 
to  recover,  even  though  the  time  for  the  performance  of 
the  contract  had  not  yet  arrived.  The  breach  was  com- 
plete upon  A's  repudiation  of  the  agreement.  The 
reason  for  this  decision  has  been  already  explained. 
The  contract  is  in  itself  a  thing  of  value,  a  relation, 
existing  between  the  two  parties.  If  either  breaks 
this  relation,  even  though  it  be  before  the  time  when 
the  contract  is  to  be  performed,  he  has  forever  severed 
the  cords  which  bind  the  two  individuals,  and  has  been 
guilty  of  a  complete  breach.  It  is  obvious  that  if,  after 
the  time  for  the  performance  has  arrived  or  during  the 
course  of  the  performance  of  the  contract,  one  party 
refuses  to  continue,  such  a  breach  will  absolutely 
destroy  the  contractual  relations. 

4.  Where  one  Party  makes  the  Performance  Impossible. 
—  Not  only  may  one  party  to  a  contract  be  guilty  of  a 
breach  by  formally  refusing  to  carry  out  his  part  of  it, 
but  if  he  deliberately  places  it  out  of  his  power  to  per- 
form, he  has  been  guilty  of  just  as  complete  a  severance 
of  the  contractual  relation.  As  in  the  other  cases,  this 
will  operate  as  a  complete  breach  whether  it  is  done 
before  or  after  the  time  for  the  performance  of  the  con- 
tract. A  promised  to  assign  all  his  interest  in  a  lease 
to  B  before  the  expiration  of  seven  years.  After  one 
year  A  assigned  to  another  party.  This  gave  B  a  right 
to  sue  at  once.  He  did  not  have  to  wait  until  the 
expiration  of  the  seven  years. 

An  interesting  case  arose  during  the  late  war  between 
China  and  Japan.     An  Englishman  had  been  hired  by 


DISCHARGE  BY  BREACH  133 

the  Japanese  government  to  act  as  fireman  on  a 
Japanese  warship  on  a  trip  from  the  Tyne  to  Yoko- 
hama. During  the  voyage  war  against  China  was  de- 
clared by  Japan.  If  he  had  continued  in  the  service, 
the  Englishman  would  have  been  liable  to  punishment 
by  his  home  government,  under  the  penalty  imposed 
by  the  foreign  enlistments  act.  He  contended  that  the 
Japanese  government,  by  declaring  war,  had  made  his 
performance  of  the  contract  impossible,  and  that  he, 
therefore,  had  a  right  of  action  for  the  breach.  The 
court  sustained  him  in  this  contention. 

5.  Failure  of  Performance.  —  We  *have  explained  how 
a  refusal  to  perform,  or  putting  it  out  of  one's  power 
to  perform,  operates  as  a  complete  breach  of  a  contract. 
It  is  just  as  complete  a  breach  if  one  party  without 
refusing  merely  fails  to  do  his  part.  This  really  needs 
no  explanation  further  than  the  observation  that  the 
failure  to  perform  must  be  a  failure  to  perform  an  essen- 
tial part  of  the  contract,  and  must  be  applicable  to  it  as 
a  whole.  The  other  party  is  not  entitled  to  treat  the 
failure  to  perform  as  a  breach  until  after  the  time  for 
the  performance  has  entirely  passed. 


CHAPTER  IV 

DISCHARGE  BY  IMPOSSIBILITY  OF  PERFORMANCE 

1.  Impossibility  Apparent  on  the  Face  of  the  Contract. 
—  It  sometimes  happens  that  parties  who  have  entered 
into  agreements  will  be  released  therefrom,  owing  to 
some  reason  not  connected  with  the  contract  itself,  but 
which  the  court  nevertheless  will  take  into  consider- 
ation. Earlier  in  the  discussion  we  had  an  illustration 
in  which  A  agreed  to  give  B  a  sum  of  money,  in 
consideration  of  which  B  agreed  to  drink  up  all  the 
water  in  the  sea.  There  was,  as  we  saw,  no  contract 
created  in  the  case,  because  the  consideration  which 
was  given  was  not  a  real  consideration,  it  being  mani- 
festly impossible  to  perform  it.  Technically  speaking, 
this  is  not  a  case  of  discharge  of  contract  at  all,  because 
no  contract  ever  came  into  existence,  but  it  is  proper  to 
refer  to  it  here  because  of  its  similarity  to  the  subject 
under  discussion. 

2.  Impossibility  on  Account  of  Mistake.  —  We  have  also 
discussed  in  another  part  of  the  subject  of  contracts  the 
situation  in  which  it  was  impossible  to  perform  the  con- 
tract by  virtue  of  some  mistake  into  which  the  parties 
had  fallen.  In  the  illustration  where  A  and  B  con- 
tracted for  the  sale  of  a  cargo  of  corn,  then  supposed  to 
be  on  board  a  certain  ship,  which  was  in  fact  at  the 
bottom  of  the  ocean,  we  saw  that  there  was  no  contract. 
It  might  be  said  there  was  no  contract  because  it 
was  impossible  to  be  performed;  but  the  real  reason  is 
that  the  original  agreement  being  based  on  mistake,  no 

134 


DISCHARGE  BY  IMPOSSIBILITY  TO  PERFORM         135 

contract  was  ever  created.  This  case  of  impossibility 
of  performance  is  also  referred  to  at  this  point,  not 
because  it  is  a  technical  case  of  discharge  of  contract, 
but  because  it  is  very  closely  allied  to  what  follows. 

3.  Impossibility  arising  after  Contract  is  made.  —  In  the 
two  cases  above  mentioned,  where  the  impossibility 
existed  at  the  time  the  agreement  was  formed,  we  saw 
that  no  contract  was  created.  We  now  reach  a  situa- 
tion where  there  was  no  impossibility  existing  at  the 
time  when  the  parties  made  their  agreement,  but  where 
some  facts  that  have  arisen  since  have  caused  the  per- 
formance of  the  contract  to  become  impossible.  As  a 
general  rule,  common  law  courts  will  not  excuse  a  man 
from  his  obligation  to  perform  a  contract  on  the  plea 
that  it  has  become  difficult  or  impossible  for  him  to  do 
so.  They  cannot,  of  course,  make  him  perforin  it  if  it 
is  impossible  to  do  so;  but  he  is  answerable  in  damages 
for  any  loss  accruing  to  the  opposite  party  by  virtue 
of  his  failure  to  perform,  notwithstanding  the  fact  of 
the  impossibility.  This  occurs  only  in  cases  where  the 
promisor  has  made  his  promise  without  conditions.  If 
he  does  not  wish  to  become  responsible  for  loss  in  such 
cases,  he  should  introduce  some  such  stipulation  when 
he  makes  his  contract. 

A  agreed  to  carry  a  shipload  of  corn  from  New  York 
to  Philadelphia,  and  to  unload  it  at  a  wharf  in  the 
Delaware  River  before  the  19th  of  June,  1900.  If  the 
weather  had  been  propitious,  A  would  have  had  plenty 
of  time  to  perform  his  contract.  As  it  was,  a  great 
storm  absolutely  prevented  him  from  getting  up  the 
river  until  ten  days  later.  B  sued  him  for  the  failure 
to  perform  within  the  time  specified,  and  A  replied  that 
it  was  absolutely  impossible  for  him  to  have  done  so 


136  CONTRACTS 

on  account  of  circumstances  which  were  entirely  beyond 
his  control.  But  this  was  no  excuse.  If  A  did  not 
wish  to  be  held  responsible  in  such  a  case,  he  should 
have  said  in  his  contract  that  he  would  unload  at  the  day 
specified,  "storms  excepted." 

A.  Cases  where  Subsequent  Impossibility  will  Excuse.  — 
Although  the  general  rule  is  as  we  have  stated  it, 
there  are  some  situations  in  which  the  law  will  excuse 
the  performance  of  a  contract  if  it  has  become  impos- 
sible by  events  arising  subsequent  to  its  formation. 

If,  after  the  contract  is  made,  there  has  been  a  change 
in  the  law  of  the  country  wherein  it  was  to  have  been  per- 
formed, which  absolutely  prevents  it  from  being  carried 
out,  the  parties  will  be  excused  from  performance.  A 
sold  land  to  B,  B  making  a  contract  by  which  he  agreed 
that  upon  a  certain  piece  of  the  land  which  he  had 
bought  from  A,  neither  he  nor  his  assigns  would  allow 
any  buildings  except  ornamental  ones  to  be  erected. 
An  act  of  Parliament  provided  for  the  erection  of  a 
railroad  station  upon  that  very  spot.  A  attempted  to 
charge  B  for  the  damages  accruing  to  him  by  virtue  of 
the  erection  of  the  station,  claiming  that  B  had  uncon- 
ditionally bound  himself  and  his  assigns  that  no  such 
buildings  should  be  placed  at  that  point.  The  court 
decided  that  B  was  excused.  The  act  of  Parliament 
authorizing  the  erection  of  the  building  made  the  ful- 
fillment of  his  agreement  impossible. 

If  a  contract  has  been  made,  calling  for  the  perform- 
ance of  some  personal  service  on  the  part  of  one  of  the 
parties  to  it,  and  that  person  dies,  the  contract  is  then 
at  an  end,  as  it  is  impossible,  of  course,  for  it  to  be 
performed.  The  estate  of  the  decedent  does  not  have 
to  answer  in  damages  for  the  failure  to  perform. 


CHAPTER  V 

DISCHARGE  BY  OPERATION  OF  LAW 

A.  Merger.  —  Under  certain  circumstances,  a  contract 
may  be  discharged  by  operation  of  law  without  any 
specific  agreement  by  the  parties,  and  also  without  any 
breach  or  intervention  of  circumstances  making  the 
performance  impossible.  We  have  referred  briefly  to 
the  case  where  a  sealed  contract  is  made  about  the  same 
subject-matter  already  included  in  a  simple  contract. 
We  saw  that  the  simple  contract  disappeared,  and  that 
we  had  left  only  the  sealed  contract.  This  is  what  is 
known  as  "merger."  Whenever  two  instruments,  one 
of  which  is  of  a  higher  or  more  solemn  order  than  the 
other,  refer  to  the  same  subject-matter,  the  lesser  merges 
into  the  greater,  and  is  thereby  discharged. 

B.  Alterations  of  a  Contract.  — It  will  be  remembered 
that  two  parties  to  a  contract  may  alter  it  by  mutual 
consent.  It  goes  without  saying  that  one  cannot  alter 
it  without  the  consent  of  the  other.  If  I  make  a  prom- 
issory note  in  your  favor  for  the  amount  of  one  hundred 
dollars,  and  you  so  alter  it  that  it  reads  one  thousand 
dollars,  not  only  is  there  no  contract  by  which  I  am 
obliged  to  pay  you  one  thousand  dollars,  but  the  agree- 
ment which  I  originally  made  to  pay  you  one  hundred 
dollars  is  discharged.  You,  by  your  alteration  of 
the  contract,  have  relieved  me  from  any  further 
responsibility.     This  is  always  the  case  if  alterations 

137 


138  CONTRACTS 

be  made  by  one  party  without  the  consent  of  the  other, 
provided  the  alteration  is  a  change  in  a  material  term  of 
the  contract,  and  is  made  intentionally.  If  it  be  made 
unintentionally,  the  original  contract  stands  as  it  was 
in  the  first  place;  or  if  the  alteration  be  made  by  a 
stranger,  that  does  not  affect  the  original  contract  at 
all.  In  order  to  work  a  discharge,  the  alteration  must 
be  made  by  a  party  to  the  contract  with  the  intention 
of  varying  the  rights  of  the  parties. 

C.  Bankruptcy.  —  There  are  certain  acts  of  Congress 
in  force  in  this  country  providing  that  in  case  a  man 
becomes  unable  to  pay  his  debts,  he  may  surrender  all 
his  property  to  the  court  in  order  that  it  may  be  dis- 
tributed among  his  creditors,  and  he  is  thereafter  dis- 
charged from  any  further  liabilities  for  any  of  his 
former  debts.  This  discharge  in  bankruptcy  oper- 
ates not  only  to  discharge  debts  which  he  may  owe, 
but  also  discharges  all  contracts  on  account  of  which 
he  may  be  under  some  obligation.  If,  however,  a  man 
who  has  been  thus  discharged  makes  a  new  promise  to 
fulfill  his  contract  or  to  pay  his  debts,  this  promise  will 
revive  the  old  obligation,  and  he  may  be  compelled  to 
perform  without  any  new  consideration. 


SECTION  V 
KEMEDIES  FOR  BREACH  OF  CONTRACTS 


CHAPTER   I 

REMEDIES  IN  COURTS  OF  LAW 

1.  Measure  of  Damages.  —  It  has  been  shown  how  one 
party  to  a  contract  may  be  guilty  of  a  breach,  which 
operates  to  discharge  the  opposite  party  from  any 
liability  to  perform  his  part.  The  contractual  rela- 
tion has  been  absolutely  severed,  and  neither  party  has 
any  more  rights  under  the  contract  itself.  But,  as  you 
can  well  believe,  it  would  be  most  unjust  if  the  injured 
party  did  not  have  some  remedy  open  to  him.  Although 
he  has  lost  his  rights  under  the  contract,  he  has  gained 
in  place  of  them  a  right  to  sue  for  damages.  If  he 
does  so,  he  may  recover  an  amount  sufficient  to  put 
him  in  the  same  position,  so  far  as  money  can  do  it, 
as  that  which  he  enjoyed  before  the  breach  occurred. 
When  two  parties  enter  into  a  contract,  they  undertake 
mutually  to  perform  it,  or  to  pay  any  damages  that 
could  reasonably  be  expected  to  follow  from  a  breach  of 
it.  Consequently,  where  one  is  suing  for  damages,  he 
can  recover  only  those  damages  which  could  reasonably 
be  expected  to  result  from  a  breach  of  the  particular 

139 


140  CONTRACTS 

contract  that  was  broken.  Suppose  a  railroad  company 
agrees  to  carry  you  from  New  York  to  Chicago  in  twenty- 
four  hours.  The  company  fails  to  perform  its  contract 
in  that  the  train  is  three  hours  late.  As  a  result  of  the 
lateness  of  the  train,  you  miss  an  opportunity  to  meet  a 
business  engagement  which  would  have  been  worth  ten 
thousand  dollars  to  you.  You  could  not  recover  ten 
thousand  dollars ;  that  amount  would  not  be  an  ordinary 
result  of  the  lateness  of  the  train. 

It  must  also  be  remembered  that  damages  for  breach 
of  contract  are  for  compensation,  and  not  for  punish- 
ment. The  plaintiff  can  recover  only  his  actual  pecu- 
niary loss,  not  for  injury  to  his  feelings  or  to  punish 
the  defendant.  To  this  rule  there  is  one  exception. 
In  the  action  for  breach  of  promise  of  marriage,  the 
plaintiff  may  recover  for  injury  to  his  or  her  feelings  as 
well  as  for  the  pecuniary  loss,  if  any.  If  an  agree- 
ment has  been  made  as  to  the  amount  of  damages  to  be 
paid  in  the  event  of  a  breach,  that  amount  is  recoverable 
as  liquidated  damages.  The  distinction  between  liqui- 
dated damages  and  penalties  has  already  been  explained. 


CHAPTER  II 

REMEDIES  IN  COURTS  OF  EQUITY 

1.  General  Principles  of  Equitable  Jurisdiction.  — 
Sometimes,  from  the  peculiar  nature  of  the  contract 
which  has  been  made,  money  alone  cannot  compensate 
the  injured  party  for  the  breach.  From  the  explanation 
which  has  been  given  of  the  duties  of  courts  of  equity, 
you  will  understand  that  this  is  one  of  the  particular 
places  where  their  jurisdiction  is  invoked.  If  damages 
will  not  compensate,  that  is,  if  at  law  there  is  no 
adequate  remedy,  then  the  one  who  has  been  injured 
may  apply  to  a  court  of  equity,  asking  it  to  force  the 
opposite  party  to  carry  out  his  part  of  the  contract. 
This  remedy  is  what  is  known  as  specific  performance. 
The  court  of  equity  will  grant  it,  if  it  clearly  appears 
that  there  is  no  adequate  remedy  at  law,  and  if  no  valid 
reason  is  urged  why  the  contract  should  not  be  carried 
out  in  conformity  with  the  original  agreement  of  the 
parties. 

A.  When  there  is  no  Adequate  Remedy  at  Law.  —  It  is 
sometimes  a  difficult  question  to  decide  when  there  is 
not  an  adequate  remedy  at  law.  One  of  the  most  com- 
mon illustrations  of  such  a  contract  is  one  for  the  pur- 
chase of  land.  Suppose  you  have  contracted  to  purchase 
a  particular  lot  of  ground,  intending  to  erect  a  residence 
upon  it.  You  have  perhaps  made  extensive  plans  relat- 
ing to  its  erection,  and  for  your  arrangements  after  you 

141 


142  CONTRACTS 

have  permanently  located  there.  You  no  doubt  chose 
the  site  of  ground  largely  by  virtue  of  its  location, 
perhaps  because  it  was  situated  in  close  proximity  to 
friends,  or  because  of  the  fine  view  that  could  be  obtained 
from  the  premises..  Damages  could  not  compensate 
you  for  the  loss  of  these  things.  You  could  not  go 
into  the  market  and  buy  another  lot  of  ground  which 
would  suit  you  as  well.  If  you  could,  damages  would 
compensate  you,  because  the  other  party  would  be  com- 
pelled to  pay  you  the  difference  between  the  price 
which  you  had  to  pay  for  the  land  which  you  did  buy, 
and  the  price  you  were  intending  to  pay  under  the  con- 
tract. Courts  of  equity  will  nearly  always  specifically 
enforce  contracts  for  the  purchase  of  land. 

If  your  agreement  is  for  the  purchase  of  goods,  you 
can,  as  a  rule,  be  fully  compensated  by  damages,  for, 
failing  to  get  them  under  your  agreement,  you  can, 
ordinarily,  go  into  the  market  and  purchase  them  else- 
where. If  you  were  compelled,  in  such  a  case,  to  pay 
more  for  them  than  you  had  contracted  to  pay,  you 
could  recover  the  difference  from  the  party  who  had 
broken  his  contract  with  you.  Sometimes,  however, 
the  specific  goods  may  possess  to  you  a  peculiar  value, 
which  cannot  be  measured  in  money.  If  so,  you  may 
have  specific  performance,  as,  for  instance,  if  you  had 
agreed  to  purchase  an  heirloom  that  to  you  is  of  a 
value  far  above  its  intrinsic  worth. 

B.  Kemedy  Discretionary.  —  It  should  be  remembered 
in  this  connection  that  the  remedies  granted  by  a  court 
of  equity  are  discretionary.  It  may  grant  an  injunc- 
tion to  compel  the  opposite  party  to  perform  the  con- 
tract if  it  sees  fit,  but  if  it  does  not  see  fit,  then  you 
are  not  entitled  to  demand  it  as  you  would  be  entitled 


REMEDIES  IN  COURTS  OP  EQUITY  143 

to  demand  a  remedy  in  a  court  of  law,  because  the 
courts  of  equity  are  not  absolutely  bound  by  rigid  rules, 
as  courts  of  law  are.  If  the  party  who  is  seeking  spe- 
cific performance  has  been  guilty  of  improper  conduct, 
he  will  not  be  permitted  to  succeed.  If  the  contract 
which  he  entered  into  with  the  opposite  party  is  an 
unjust  contract,  the  court  will  not  enforce  it.  If  he 
has  been  careless  about  prosecuting  his  remedy,  and 
has  waited  a  much  longer  time  than  was  necessary, 
again  will  he  be  refused  the  relief  which  he  asks. 

C.  Contracts  involving  Duties  of  Supervision.  —  Fol- 
lowing out  the  idea  expressed  in  the  preceding  para- 
graph, the  court  will  refuse  specific  performance,  if 
granting  it  would  involve  the  court  in  duties  which 
it  does  not  care  to  undertake.  Suppose  B  has  agreed 
to  build  a  railroad  for  A,  the  performance  of  which 
agreement  would  necessarily  involve  the  labor  of 
months,  and  perhaps  of  years.  If  the  court  should 
command  B  to  build  the  road,  its  command  would  be 
useless  unless  it  would  see  to  it  that  B  performs  his 
work  faithfully.  To  do  that  would  require  duties  of 
supervision  and  oversight  lasting  over  this  long  period 
of  time.  This  the  court  will  not  undertake.  If  spe- 
cific performance  involves  such  duties  as  this  it  will, 
therefore,  be  refused.  A  contract  to  build  will  rarely 
be  enforced. 

D.  Contracts  for  Personal  Service.  —  If  the  contract  is 
one  which  calls  for  a  personal  service  from  one  party 
to  another,  the  court  will  never  specifically  enforce  it, 
because  to  force  individuals  to  maintain  a  close  personal 
relationship  toward  each  other  when  they  do  not  wish 
to  do  so,  would  be  worse  than  to  allow  the  contract  to 
go  unperformed.     Moreover,  it  is  often  impossible  to 


144  CONTRACTS 

enforce  such  contracts.  If  A  agrees  to  sing  for  B,  the 
court  might  compel  A  to  go  upon  the  platform  and 
might  perhaps  compel  her  to  sing,  but  it  certainly  could 
not  compel  her  to  give  her  best  energies  to  the  work. 
If  in  such  a  case,  however,  the  party  has  agreed  both 
to  do  some  act  and  to  refrain  from  doing  some  other 
act,  the  court  will  sometimes  enforce  the  second  part 
of  the  contract  when  it  cannot  enforce  the  first.  Made- 
moiselle Wagner  had  agreed  to  sing  for  a  theatrical 
manager,  named  Lumley,  for  an  entire  season;  she 
had  also  agreed  to  sing  for  no  one  else  during  that 
period.  She  refused  to  perform  her  contract.  Lumley 
asked  a  court  of  equity  to  enforce  her  to  do  so.  The 
court  said  it  could  not  make  her  sing,  but  it  could 
prevent  her  from  singing  for  some  one  else,  which  it 
did.  The  practical  effect  of  this  decision  was  to  force 
Mademoiselle  Wagner  to  sing  for  Lumley,  because 
otherwise  she  would  have  been  compelled  to  remain  in 
idleness. 


CHAPTER   III 

HOW  EIGHTS  OF  ACTION,   AKISING  FROM   BREACH  OF 
CONTRACT,   MAY  BE   DISCHARGED 

A.  By  Act  of  the  Parties.  —  When  the  contract  is 
broken,  all  legal  rights  under  it  disappear;  in  place  of 
them  the  injured  party  has  a  right  of  action  for  the 
breach.  The  next  question  is,  How  may  this  right  of 
action  for  the  breach  be  discharged  ?  The  first  way  in 
which  it  may  be  discharged  is  by  the  voluntary  act  of 
the  parties.  The  injured  man  may  release  the  opposite 
party  to  the  contract  from  all  claims  which  he  may  have 
by  virtue  of  the  breach.  Such  release  must  either  be 
under  seal  or  else  it  must  be  supported  by  a  considera- 
tion; otherwise  it  is  not  binding.  The  usual  con- 
sideration in  such  a  case  would  be  the  payment  of  a 
sum  in  satisfaction  of  the  damages. 

B.  By  Suit  and  Judgment.  —  If  the  parties  are  unable 
to  reach  an  amicable  agreement  with  regard  to  the  sat- 
isfaction of  the  claim  for  damages  arising  out  of  the 
breach,  the  injured  party  may  be  compelled  to  resort  to 
a  court  of  law.  If  he  does  so,  and  recovers  judgment 
upon  his  claim,  the  right  of  action,  which  he  originally 
had,  thereupon  disappears.  He  now  has  a  claim  against 
the  opposite  party,  which  is  founded  entirely  upon  the 
judgment  which  he  has  recovered.  Just  as  a  simple 
contract  will  merge  into  a  sealed  contract  when  both 
relate  to  the  same  subject-matter,  so  a  right  of  action, 

145 


146  CONTRACTS 

arising  out  of  a  breach  of  contract,  will  disappear  and 
merge  into  a  debt  of  record  when  the  latter  is  created 
by  the  recording  of  the  judgment. 

C.  By  Lapse  of  Time.  —  In  England,  and  in  all  states 
of  this  country,  statutes  have  been  passed  which  pro- 
vide that  where  a  right  of  action  accrues  for  breach  of 
contract,  the  party  to  whom  such  right  accrues,  must 
prosecute  his  suit  within  a  limited  time,  specified  in 
the  act,  or  he  cannot  do  it  thereafter.  The  period 
named  varies  in  different  states.  In  most  states  the 
right  of  action,  arising  from  the  breach  of  a  simple 
contract,  must  be  prosecuted  within  six  years  from  the 
time  the  breach  occurs.  A  right  of  action,  arising 
from  the  breach  of  a  sealed  contract,  must  usually  be 
sued  upon  within  twenty  years.  In  both  cases  there  are 
exceptions  made,  if,  at  the  time  the  contract  was  broken 
and  the  right  of  action  arose,  the  person  to  whom  it 
thereby  accrued  was  under  some  kind  of  disability, 
that  is,  if  he  was  an  infant,  or  insane,  or  imprisoned, 
or  "beyond  seas,"  or,  if  a  woman,  was  married. 

If  some  one  of  these  disabilities  existed  at  the 
time  the  right  of  action  first  arose,  then  the  period 
of  time  named  in  the  act  does  not  begin  to  run  until 
the  time  when  the  disability  is  removed.  If  the  in- 
dividual was  an  infant,  the  statutory  period  is  counted 
from  the  day  he  becomes  twenty-one  years  old;  if  a 
married  woman,  it  is  counted  from  the  day  her  husband 
dies;  if  "beyond  seas,"  from  the  time  the  individual 
returns,  and  so  on.  If,  at  the  time  the  cause  of  action 
first  arose,  no  one  of  these  disabilities  existed,  the  fact 
that  one  was  afterward  imposed  upon  the  person  who 
has  the  right  of  action,  will  not  prevent  the  lapse  of 
time  from  barring  the  right.    Suppose  a  woman  twenty- 


DISCHARGE   OF  RIGHT  OF  ACTION  147 

two  years  of  age  comes  into  possession  of  a  right  of 
action  for  breach  of  a  simple  contract,  and  marries  a 
year  afterward.  Her  right  of  action  will  be  barred  six 
years  after  the  time  her  right  first  accrued.  The  fact 
that  she  afterward  married  will  not  help  her.  Just  as 
in  the  case  of  bankruptcy,  a  subsequent  promise  to  pay 
or  to  perform,  will  bind,  so  a  subsequent  promise  to 
discharge  an  obligation,  arising  from  a  contract  which 
has  been  barred  by  the  lapse  of  the  statutory  period, 
will  revive  the  old  obligation,  and  no  new  considera- 
tion is  necessary. 


PART   III 

SALES 


CHAPTER  I 

ESSENTIAL  CHARACTERISTICS 

1.  Sale  distinguished  from  Bailment  or  Exchange.  — 
The  sale  is  one  species  of  contract.  In  entering  upon 
the  discussion  of  its  nature,  we  do  not  therefore  meet 
with  many  principles  essentially  new.  All  the  ele- 
ments of  contract  which  we  discussed  in  the  preceding 
part  of  this  book,  are  also  necessary  elements  of  every 
sale. 

The  distinguishing  features  that  separate  sales  from 
other  contracts  are,  first,  the  circumstance  that  the 
sale  is  a  contract  for  the  transfer  of  the  ownership  of, 
or  title  to,  property;  and,  second,  that  the  transfer 
must  be  for  a  price  in  money.  If  the  property  in  one 
thing  is  transferred  in  consideration  of  the  transfer  of 
another  thing  of  supposedly  equal  value,  the  trans- 
action is  not  a  sale,  but  a  barter  or  exchange.  If  the 
property  be  delivered  to  another  temporarily,  with  a 
proviso  that  the  original  property  is  to  be  returned,  this 
constitutes  what  is  known  as  a  bailment.  The  title  to 
the  thing  does  not  pass  out  of  the  original  owner.  A 
barter  or  exchange  is  for  all  practical  purposes  a  sale, 

148 


ESSENTIAL  CHARACTERISTICS  149 

as  the  ownership  or  title  to  the  property  passes  from  the 
seller,  called  the  vendor,  to  the  buyer,  who  is  known  as 
the  vendee.  But  a  bailment  is  essentially  different,  for 
here  the  title  does  not  pass  at  all. 

2.  Difficulty  of  determining  between  Sale  and  Bailment. 
—  It  is  often  difficult  to  tell  whether  a  transaction  is 
a  sale  or  a  bailment.  Suppose  A  sends  wheat  to  B,  a 
miller,  in  return  for  which  B  is  to  give  to  A  a  certain 
amount  of  flour  in  payment.  Before  the  wheat  is 
ground  the  mill  burns,  and  the  grain  is  destroyed.  If 
the  wheat  is  owned  by  A,  he  suffers  the  loss.  If  it  is 
owned  by  B,  he  will  be  the  loser,  for  having  acquired 
the  title,  he  will  be  obliged  to  deliver  the  stipulated 
amount  of  flour  to  A.  In  the  case  in  hand,  the  solu- 
tion of  the  problem  would  depend  upon  the  exact  terms 
of  the  contract.  If  the  agreement  had  been  that  the 
miller  was  to  return  the  flour  made  from  the  identical 
wheat  deposited  with  him,  then  the  title  to  the  wheat 
remained  in  the  original  owner,  and  the  contract  was 
one  of  bailment.  If,  on  the  other  hand,  the  same  wheat 
was  not  to  be  returned  in  the  form  of  flour,  but  was 
to  be  mixed  with  other  wheat,  and  the  owner  was  to  be 
paid  with  flour  made  from  other  wheat,  then  the  con- 
tract would  be  a  sale  or  exchange,  and  the  title  having 
passed  to  the  miller,  he  would  suffer  the  loss. 

This  illustration  embodies  the  general  rule  for  dis- 
tinguishing between  sale  and  bailment.  If  the  con- 
tract calls  for  the  return  of  the  identical  thing,  though 
it  may  be  in  a  different  form,  it  is  one  of  bailment. 
Where  the  identical  thing  is  not  to  be  returned,  but  is 
to  be  paid  for  by  money  or  by  some  other  thing  of  value, 
the  contract  operates  to  pass  the  title,  and  is  a  sale  or 
exchange. 


150  SALES 

3.  Exception  to  the  Rule.  —  There  is  one  exception  to 
this  rule  which,  as  it  is  a  very  common  one,  should  be 
referred  to  at  this  point.  If  you  deposit  wheat  with 
the  owner  of  a  warehouse,  under  a  contract  by  which 
you  are  to  receive  on  demand,  not  your  identical  wheat, 
but  wheat  of  an  equal  grade,  your  contract  is  a  bail- 
ment and  not  a  sale.  It  would  be  impracticable  to 
keep  everybody's  wheat  separate  from  the  rest,  when  so 
many  thousands  of  bushels  are  stored  in  one  building; 
consequently,  all  of  it  which  is  of  a  similar  grade  is 
mixed  up  and  stored  together. 

If  this  has  been  done  and  the  warehouse  burns, 
all  the  depositors  will  lose  their  wheat  if  it  is  still 
their  property,  for,  assuming  the  fire  to  be  accidental, 
they  will  have  no  claim  against  the  owner  of  the  ware- 
house. But  if  the  title  to  the  wheat  has  passed  to  the 
warehouseman,  then  the  loss  falls  on  him  alone.  He 
is  still  bound  to  pay  the  farmers  for  their  wheat.  It 
can  readily  be  seen  that  the  latter  result  would  be 
unjust.  The  intention  of  the  depositors  was  to  make  a 
bailment,  and  not  a  sale.  The  courts,  taking  this  into 
consideration,  have  decided  that,  although  such  a  con- 
tract does  not  provide  for  the  return  of  the  specific 
thing,  it  is,  nevertheless,  a  bailment.  They  reconcile 
this  with  the  rule  above  given  by  saying,  that  while 
the  specific  wheat  is  not  to  be  returned,  yet  the  return 
of  wheat  of  equal  grade  is  practically  the  same  thing 
as  the  return  of  the  identical  wheat  put  in,  —  in  short, 
that  a  contract  for  the  return  of  an  equal  number  of 
bushels  of  grain  of  the  same  quality  is,  for  all  practical 
purposes,  a  contract  for  the  return  of  the  same  grain. 


CHAPTER  II 

WHO  MAY  SELL 

1.  Parties  must  be  Capable  and  Vendor  must  be  Owner. 
—  The  parties  to  a  contract  of  sale  must,  in  the  first 
place,  be  capable  of  contracting.  This  is  obvious  from 
the  statement  above,  that  all  the  essential  elements  of 
a  contract  must  be  present.  In  the  second  place,  the 
vendor,  as  a  general  rule,  must  be  the  owner  of  the 
property  which  he  intends  to  sell,  i.e.  he  must  either 
be  the  owner  or  his  agent.  One  of  the  fundamental 
principles  of  the  common  law  is  that  the  title  to  property 
must  be  protected.  If  your  property  is  stolen  and  sold 
to  A,  the  latter  gets  no  title,  because  the  thief,  having 
none,  could  give  none  to  the  purchaser. 

When  we  say  that  the  seller  must  be  the  owner,  how- 
ever, we  do  not  necessarily  mean  the  absolute  owner.  He 
may  have  a  title  which  he  has  obtained  by  fraud ;  but  if 
he  has  title  at  all,  he  may  convey  a  perfect  title  to  an  in- 
nocent purchaser.  This  is  particularly  true  of  the  sale 
of  negotiable  instruments,  such  as  promissory  notes  and 
bills  of  exchange.  It  is  also  true,  though  in  a  more 
restricted  way,  of  sales  of  personal  property.  The 
possession  of  personal  property  is  prima  facie  evidence 
of  ownership ;  and  though  a  vendor  may  have  acquired 
his  possession  and  title  to  the  chattel  by  fraud,  and 
although  the  real  owner  could  set  the  sale  aside  as 
against  the  fraudulent  vendee,  he  cannot  do  so  as 
against  an  innocent  vendee. 

151 


152  SALES 

A.  Voidable  Title  and  no  Title.  —  It  is  sometimes  dif- 
ficult to  determine  between  cases  where  the  fraudulent 
vendee  has  actually  acquired  title,  even  though  it  be  a 
voidable  one,  and  cases  where  he  has  acquired  no  title 
at  all.  If  the  latter  be  the  case,  he  can  convey  nothing 
to  a  subsequent  purchaser  from  him.  If  the  original 
vendor  parts  with  the  property  with  the  intention  of 
selling  to  the  party  who  is  negotiating  with  him,  then, 
no  matter  how  he  may  have  been  deceived,  he  has  parted, 
at  least  temporarily,  with  the  title,  and  the  fraudulent 
purchaser  may  convey  to  a  third  person  a  better  title  than 
he  himself  has.  But  it  sometimes  happens  that  a 
would-be  vendee  will  pretend  to  be  the  agent  of  some 
one  else. 

A  went  to  B,  a  farmer,  and  offered  to  buy  his  wool, 
representing  himself  to  be  the  agent  of,  and  purchas- 
ing for,  X  and  Company,  a  well-known  firm  with 
which  B  was  familiar.  As  a  matter  of  fact,  A  had  no 
connection  whatever  with  the  firm;  but  B,  believing 
his  representations,  sold  his  wool,  as  he  thought,  to  X 
and  Company,  and  shipped  to  them.  A  presented  him- 
self to  the  freight  agent  at  the  other  end  of  the  line, 
again  represented  himself  to  be  an  agent  of  X  and 
Company,  and  obtained  possession  of  the  wool.  X  and 
Company,  who  knew  nothing  of  the  previous  transac- 
tions, bought  of  A,  who  pocketed  the  money  and  left 
for  parts  unknown. 

B,  finding  himself  swindled,  sued  X  and  Company 
to  regain  possession  of  the  wool,  contending  that  he 
was  still  the  owner;  that  as  A  got  no  title,  he  could 
give  none  to  X  and  Company,  and  that  the  wool  should 
be  returned.  On  the  other  hand,  it  was  argued  that 
A  got  a  voidable  title,  and  X  and  Company,  being 


WHO  MAY  SELL  153 

innocent  purchasers,  should  be  protected.  The  court 
decided  that  B  could  recover.  He  never  intended  to 
sell  to  A.  He  intended  to  sell  to  X  and  Company.  X 
and  Company  never  intended  to  buy  of  him,  hence 
there  was  no  contract  at  all,  and  therefore  no  passing 
of  the  title.  As  it  still  remained  in  B,  he  was  entitled 
to  get  his  wool  back  again. 

If,  in  the  illustration,  A  had  represented  himself 
to  be  C,  and  B  had  sold  to  A,  thinking  him  to  be  C, 
the  court  would  have  refused  a  recovery,  on  the 
ground  that  if  the  vendor  intends  to  sell  to  the  man 
before  him,  even  though  he  is  mistaken  as  to  his 
identity,  the  title  will  pass.  This  is  explained  by  say- 
ing that  when  you  see  the  individual  with  whom  you 
are  dealing,  you  sell  to  the  personality  before  you,  and 
the  fact  that  you  are  in  error  as  to  his  name  is  not 
material;  whereas,  when  you  do  not  intend  to  sell  to 
him  at  all,  but  to  some  firm  whom  he  falsely  says  he 
represents,  you  do  not  sell  to  anybody.  You  Ho  not 
intend  to  sell  to  the  party  before  you,  and  the  firm 
whom  he  says  he  represents,  does  not  intend  to  buy, 
consequently  there  is  no  contract,  and  not  even  a  void- 
able title  can  pass.  When  you  bargain  with  the  man 
before  you,  his  personality  outweighs  your  supposed 
knowledge  as  to  his  identity.  Of  course,  in  such  a  case, 
the  contract  may  be  set  aside  by  you  if  it  is  unper- 
formed; but  if  the  purchaser  has  sold  to  an  innocent 
third  party,  you  cannot  take  the  property  so  acquired 
away  from  him. 

2.  Cases  where  Vendor  who  has  no  Title  at  All  may 
Convey.  —  There  is  a  class  of  cases  which  is  an  excep- 
tion to  the  rule  that  one  who  has  no  title  at  all  can  con- 
vey none.     When  the  true  owner  has  permitted  some 


154  SALES 

one  else  to  exercise  acts  of  ownership  over  his  property, 
to  such  an  extent  as  to  deceive  other  people  into  believ- 
ing that  the  apparent  owner  is  the  true  owner,  then  if 
the  property  be  sold  to  innocent  third  parties,  who  rely 
upon  the  apparent  ownership,  the  true  owner  cannot 
complain.  The  innocent  purchaser  therefore  really 
gets  a  good  title. 

In  such  cases  it  is  not  enough  that  the  owner  shall 
have  surrounded  the  vendor  with  the  appearances  of 
ownership,  —  the  purchaser  must  actually  have  been 
deceived  by  them.  Furthermore,  although  the  vendor 
may  have  been  given  some  of  the  appearances  of  owner- 
ship, and  even  though  the  purchaser  has  been  deceived, 
yet  he  will  not  gain  a  complete  title  unless  the  appear- 
ances were  plain  enough  to  deceive  any  ordinary  man. 

The  mere  fact  that  the  property  was  in  the  possession 
of  the  vendor  is  not  enough,  nor  that  he  has  retained  it 
for  a  long  time,  with  the  consent  of  the  owner.  Thus, 
where *a  father  loaned  a  horse  to  his  son,  allowing  him 
to  use  it  as  his  own,  and  even  speaking  of  it  as  his 
son's  horse,  the  court  decided  that  this  alone  would  not 
be  sufficient  to  deceive  ordinary  people  into  believing 
that  it  was  actually  the  property  of  the  son,  and  an 
innocent  purchaser  from  him  got  no  title. 

The  most  common  instances  of  cases  where  the  pur- 
chaser gets  a  good  title  are  cases  where  the  vendor  has 
retained  in  his  own  possession  a  chattel  formerly  be- 
longing to  him.  There  his  retention  would  operate  to 
deceive  third  parties,  and  they  are  protected.  This 
particular  phase  of  the  question  will  be  discussed  more 
at  length  in  a  later  paragraph.  As  another  instance  of 
the  conveyance  of  a  good  title  by  one  who  has  none, 
there  is  a  rule  of  law  in  England  that  if  goods  are  sold 


WHO  MAY  SELL  155 

in  the  open  market,  in  places  where  such  goods  are 
usually  exposed  for  sale,  the  purchaser  acquires  a  good 
title,  even  though  the  articles  might  have  been  stolen 
from  some  third  party.  This  is  called  the  doctrine  of 
market  overt,  but  has  never  been  in  force  in  the  United 
States. 

3.  Cases  where  True  Owner  invests  Fraudulent  Vendor 
with  Apparent  Authority  to  Sell.  —  Although  the  owner 
of  property  may  not  have  given  another  the  apparent 
ownership  of  it,  he  may  have  given  him  the  apparent 
authority  to  sell  it.  When  the  vendor  sells,  the 
purchaser  thinks  he  is  buying  from  the  agent  of  the 
true  owner.  When  we  get  to  the  subject  of  Agency, 
you  will  learn  that  one  may  make  a  valid  contract  or  a 
sale,  by  means  of  an  agent,  just  as  well  as  he  may  do  it 
himself.  You  will  also  learn  that  if  the  agent  makes 
a  sale  which  the  principal  has  not  authorized  him  to 
make,  no  title  will  pass.  The  same  theory  applies  as 
in  the  case  of  a  sale  by  one  who  has  no  title,  i.e.  no 
man  can  be  deprived  of  his  property  without  his  own 
consent;  consequently,  as  a  general  rule,  the  sale  by  the 
agent  passes  nothing  unless  he  was  authorized  to  make 
it.  But  where  the  principal  has  apparently  given  him 
authority  to  sell,  the  same  rule  should  and  does  apply, 
as  in  cases  where  the  owner  has  given  the  fraudulent 
vendor  the  appearance  of  being  the  owner.  In  both 
cases  third  parties  are  deceived.  In  both,  if  the  appar- 
ent ownership  or  apparent  authority  be  sufficient  to 
deceive,  the  innocent  purchaser  will  be  protected. 

4.  Factors'  Acts.  —  A  "  factor  "  is  an  agent  to  whom 
goods  are  shipped  to  be  sold  by  him  on  commission. 
The  name  "commission  merchant"  is  perhaps  more 
familiar  than  "factor."     If  goods  are  shipped  for  this 


156  SALES 

purpose  to  a  factor,  he,  obviously,  has  the  apparent  and 
usually  the  real  authority  to  sell.  In  the  many  thou- 
sands of  business  transactions  of  this  character  which 
daily  take  place,  it  would  be  very  inconvenient  to 
require  every  purchaser  to  investigate  the  exact  extent 
of  the  authority  of  the  commission  merchant  from  whom 
he  proposes  to  buy.  In  order  to  obviate  this  difficulty 
and  facilitate  business,  various  acts  of  legislation  have 
been  passed  in  England,  and  in  this  country,  all  of  which 
contain  substantially  the  same  provisions,  viz.,  that 
whenever  goods  have,  in  the  regular  course  of  trade,  been 
intrusted  to  a  factor,  or  commission  merchant,  for  pur- 
poses of  sale,  the  purchaser  has  a  right  to  suppose  that 
the  factor  has  the  authority  to  make  an  absolute  sale, 
and  may  purchase  without  fear  of  loss,  for  the  act  says 
his  title  thus  acquired  shall  be  valid. 

It  must  not  be  supposed,  however,  that  these  acts 
will  protect  a  purchaser  from  any  agent  to  whom  goods 
have  been  sent  for  sale.  The  operation  of  the  statutes 
is  limited  to  cases  where  the  transactions  are  strictly 
commercial  in  their  character,  i.e.  where  they  concern 
only  merchandise  in  the  limited  sense  of  the  word; 
and  they  apply  only  to  commission  merchants  or 
factors,  —  not  to  other  persons  who  may  be  temporary 
agents  for  purposes  of  sale.  In  order  to  determine  the 
exact  effect  of  these  acts,  you  should  consult  the  statutes 
of  the  state  in  which  you  live. 


CHAPTER  III 

WHEN  THE  TITLE  TO  THE  GOODS  PASSES 

1.  Title  passes  when  Contract  of  Sale  is  Complete.  — 
From  our  study  of  contracts  you  know  when  contractual 
rights  and  liabilities  are  fastened  upon  the  contracting 
parties,  viz.,  when  the  contract  has  been  completed.  In 
contracts  dealt  with  by  the  branch  of  law  which  we  are 
now  studying,  the  object  of  the  contract  is  to  pass  the 
title  to  property;  consequently,  this  object  is  accom- 
plished, and  the  title  does  pass  as  soon  as  the  contract 
is  made.  You  will  remember  that  an  ordinary  contract 
is  complete  when  offer  and  acceptance  have  taken  place ; 
but  in  the  class  of  contracts  which  we  are  now  discuss- 
ing, a  little  more  definite  manifestation  of  the  inten- 
tion of  the  parties  than  mere  oral  offer  and  acceptance, 
ordinarily  expressed  by  a  "  delivery "  of  the  goods,  is 
required. 

2.  What  is  meant  by  Delivery.  —  In  interpreting  the 
rule  that  there  must  be  delivery  before  the  title  passes, 
you  must  not  make  the  mistake  of  thinking  that  this 
means  in  all  cases  an  actual  physical  transfer  of  the 
property  sold.  In  many  cases  this  would  be  impossible. 
Delivery  may  be  defined  as  the  mental  surrender  of 
the  goods  by  the  seller  to  the  buyer.  This  mental  sur- 
render usually  takes  place  when  the  goods  are  actu- 
ally handed  over;  but,  as  we  shall  see,  not  always. 
Suppose  you  lease  me  a  house,  containing  furniture 
which  you  sell  to  me.     In  that  case  it  would,  of  course, 

157 


158  SALES 

be  absurd  for  you  to  take  the  furniture  out  of  the  house 
in  order  to  deliver  it  to  me,  who  am  about  to  put  it  back 
again.  In  all  such  cases,  if  there  is  no  intention  to 
defraud  creditors,  such  delivery,  made  mentally,  is 
good. 

If  the  vendor  has  set  apart  the  specific  goods  which  he 
intends  to  sell  to  the  vendee,  and  has  done  every  act 
which  he  has  agreed  to  do  in  reference  to  them,  and  is 
merely  waiting  for  the  vendee  to  take  them  away, 
then  obviously,  even  though  the  goods  may  still  be  on 
the  premises  of  the  seller,  they  may  be  said  to  be 
delivered  and  the  title  has  passed. 

But  suppose  A  sells  B  one  hundred  head  of  cattle, 
and,  by  the  terms  of  the  agreement,  A  is  to  weigh 
them.  He  has  not  done  so  as  yet.  The  sale  is  not 
complete.  A  sells  B  a  certain  bin  of  wheat.  A  is  to 
measure  it,  and  has  not  performed  his  agreement. 
Again,  no  title  has  passed.  Whenever  anything  at  all 
is  left  to  be  done  by  the  vendor,  the  contract  is  incom- 
plete. 

Sometimes  it  happens  that  everything  has  been  done, 
so  far  as  setting  aside  the  property  is  concerned,  but 
that  the  precise  amount  of  the  cost  of  the  article  has  not 
been  calculated.  This  of  itself  will  not  prevent  the 
delivery  from  being  considered  complete.  A  sold  B 
several  piles  of  lumber,  which  were  set  aside  and 
marked.  B  was  to  take  them  away,  measure  them,  and 
pay  A  a  specified  price  per  foot.  Before  the  lumber 
was  moved  it  was  destroyed  by  fire.  The  question 
then  arose  as  to  who  was  the  owner.  The  court  decided 
that  the  title  had  passed  to  B,  inasmuch  as  A  had  done 
everything  he  was  called  upon  to  do.  The  goods  there- 
fore could  be  properly  said  to  have  been  delivered. 


WHEN  THE  TITLE  TO  THE   GOODS  PASSES       159 

3.  Where  the  Goods  have  not  been  specifically  Set  Aside. 

—  So  far  we  have  considered  the  question  of  delivery 
as  applied  to  cases  where  specific  goods  were  the  sub- 
ject of  the  contract.  But  sales  may  be  effected  of  a 
part  of  a  large  quantity  of  goods,  when  the  part  sold  has 
not  been  separated  from  the  remainder.  Suppose  a 
dealer  sells  a  number  of  rolls  of  paper,  say  one  thou- 
sand, out  of  a  stock  containing  ten  thousand  rolls. 
The  question  then  might  come  up  whether  the  title  to 
the  paper  sold  would  pass,  unless  the  actual  number  of 
rolls  were  separated  from  the  remainder.  The  general 
rule  is  that  it  will  not.  The  property  to  be  sold  must 
be  definitely  set  aside,  and  specifically  applied  to  the 
purpose  of  the  sale,  or  no  delivery,  either  mental  or 
physical,  is  possible.  There  is  an  apparent  exception 
to  this  in  cases  where  all  the  property  mingled 
together  is  of  exactly  the  same  kind ;  for  instance, 
where  wheat  is  stored  in  an  elevator.  If  you  own  one 
thousand  bushels  in  a  certain  elevator  containing  ten 
thousand  bushels,  you  may  sell  your  one  thousand  to 
me  and  pass  the  title  by  a  delivery  of  your  grain  receipt 
only.  This  constitutes  a  symbolical  delivery,  and  as 
all  the  grain  is  alike,  no  actual  separation  is  necessary. 

4.  Mental  Consent  of  both  Parties  must  always  be  Present. 

—  While  specific  rules  are  valuable  to  aid  us  in  our 
interpretation  of  the  acts  of  the  parties,  yet  it  must  not 
be  lost  sight  of  that,  after  all,  the  real  question  at 
issue  is  whether  the  contract  of  sale  has  been  completed 
by  a  mental  surrender  of  the  goods  by  the  seller  to  the 
buyer.  This  mental  consent  must  always  be  present, 
and  even  though  there  may  be  an  actual  physical 
delivery,  no  title  will  pass  unless  it  is.  If  the  actual 
possession  of  the  goods  be  obtained  by  fraud  or  trickery 


160  SALES 

on  the  part  of  the  vendee,  this  will  not  operate  to  pass 
the  title.  Delivery  of  goods  on  board  a  train  is  usually 
deemed  to  be  delivery  to  the  buyer  to  whom  the  goods 
are  shipped,  and  so  the  title  passes  at  once ;  but  if  the 
vendor  delivers  the  wrong  article  on  board  the  train, 
the  title  to  this  will  not  pass,  because  the  vendee  never 
consented  to  have  that  article  delivered  to  him. 


CHAPTER  IV 

CONDITIONAL  SALES 

1.  Where  Title  is  not  to  pass  until  the  Price  is  Paid.  — 
Sometimes  goods  are  sold  under  certain  conditions,  by 
which  the  title  is  to  remain  in  the  vendor  until  the 
purchase  money  is  paid.  The  most  familiar  example 
of  this  is  the  sale  on  the  installment  plan.  In  such 
cases  the  chattel,  a  sewing-machine,  piano,  or  whatever 
it  may  be,  is  delivered,  but  it  is  understood  that  until 
the  last  installment  is  paid  the  title  is  to  remain  in  the 
vendor.  If  the  question  arises  between  the  two  original 
parties  to  the  agreement,  it  is  perfectly  valid;  that  is, 
the  title  does  not  pass  until  payment,  and  the  vendor 
can  retake  the  goods.  But  suppose  the  rights  of  third 
parties  should  become  involved.  Suppose  the  buyer 
executes  a  chattel  mortgage  to  a  third  party,  covering  a 
piano  purchased  under  such  conditions,  or  sells  it  to 
some  third  person,  who  buys  innocently.  In  such  a 
case  the  rule  varies  in  different  states.  In  the  major- 
ity it  is  held  that  the  buyer,  having  as  yet  acquired  no 
title,  can  convey  none.  In  others  the  conditional  sale  is 
treated  as  being  fraudulent  in  its  nature,  and  will  not 
be  strictly  carried  out  when  the  rights  of  third  parties 
intervene.  In  such  states  the  innocent  purchaser  gets 
a  perfect  title. 

2.  Sale  on  Condition  that  the  Buyer  shall  be  pleased; 
Time  Stipulations.  —  Sometimes  goods  are  sent  on 
approval,  or  on  condition   that  they  shall  please  the 

161 


162  SALES 

buyer.  In  such  a  case  the  title  does  not  pass  to  the 
vendee  unless  he  has  signified  his  intention  to  take  the 
goods,  or  has  permitted  a  reasonable  time  to  elapse.  It 
follows  that  he  will  not  have  to  pay  for  them  until 
one  of  these  two  conditions  has  been  complied  with. 

With  respect  to  time  stipulations  there  is  more  dif- 
ficulty. If  it  has  been  agreed  that  the  goods  are  to 
be  delivered  by  a  certain  time,  it  is  always  necessary  to 
determine  whether  the  parties  really  intend  the  time 
element  to  be  a  part  of  the  contract.  When  we  dis- 
cussed this  question  under  the  subject  of  contracts,  we 
there  saw  that  where  A  sold  B  a  ship,  "then  in  the 
port  of  Amsterdam,"  the  sale  was  held  void  because 
the  time  representation  was  deemed  an  essential  term 
of  the  contract,  and  it  had  not  been  complied  with. 
You  will  also  remember  that  where  an  actor  agreed 
to  present  himself  for  rehearsal  four  days  before  the 
first  performance  and  appeared  on  the  scene  only  two 
days  before,  the  court  thought  the  stipulation  was  not 
an  essential  part  of  the  contract.  Exactly  the  same 
principles  apply  to  sales.  If  the  court  is  convinced 
that  the  parties  intend  the  time  condition  to  be  an 
integral  part  of  the  contract  of  sale,  then  no  title  passes 
unless  the  condition  be  fulfilled. 

3.  Effect  of  Failure  to  perform  Conditions  Precedent.  — 
The  conditions  thus  far  discussed  may  be  termed  "  con- 
ditions precedent."  They  are  so  called  because  until 
they  are  performed  the  contract  is  not  complete  and, 
consequently,  no  title  to  property  sold  may  pass. 
As  long,  therefore,  as  you  have  not  performed  a 
condition  precedent,  which  you  are  by  the  contract 
compelled  to  perform,  you  cannot  sue  the  other  party 
for  any  breach.     Conversely,  if  he  has  failed  to  perform 


CONDITIONAL  SALES  163 

his  condition,  you  are  under  no  liability  whatever  to 
him. 

The  performance  of  such  conditions,  however,  may 
be  waived.  If  you  have  purchased  a  suit  of  clothes 
which  you  expressly  stipulate  must  be  delivered  by 
4  P.M.  on  Wednesday  or  you  w'ill  refuse  to  accept  them, 
and  if  the  vendor  fails  to  deliver  by  the  appointed  time, 
you  need  not  accept  them;  but  if  you  do,  notwithstand- 
ing the  lateness  of  delivery,  you  thereby  waive  the 
condition,  and  are  bound  thereafter.  One  may,  either 
by  express  words,  or  as  in  this  illustration,  by  con- 
duct, waive  the  performance  of  conditions  precedent. 
If  he  has  done  so  the  contract  will  be  valid  in  spite  of 
the  breach  of  the  condition.  But  in  the  absence  of 
waiver  nothing  will  excuse  from  the  performance.  If 
you  have  agreed  to  deliver  goods  at  a  certain  time, 
but  are  prevented  by  an  earthquake  or  a  great  fire,  you 
will  not  be  excused  on  account  of  that ;  you  have  broken 
your  condition  and  lost  your  sale. 

4.  Implied  Conditions.  —  There  are  some  conditions 
which,  though  not  expressly  agreed  upon,  have  the 
effect  of  express  conditions.  One  of  these  is  said  by 
some  authorities  to  be  the  payment  of  the  price,  when 
no  credit  has  been  given  to  the  buyer.  If  the  parties 
have  expressly  agreed  that  no  title  will  pass  until  pay- 
ment, then  payment  is  undoubtedly  a  condition  prece- 
dent and  the  case  is  precisely  similar  to  the  one 
previously  discussed  where  goods  are  sold  on  the 
installment  plan.  It  is  said  by  some  writers  that, 
when  no  credit  has  been  given,  there  is  an  implied 
condition  that,  as  between  the  buyer  and  seller,  the 
title  is  not  to  pass  until  payment. 

The  theory  of  this  conclusion  is  that  if  the  sale  is 


164  SALES 

understood  to  be  for  immediate  payment,  i.e.,  if  no 
credit  be  given,  then  the  parties  must  have  meant  to 
make  the  payment  of  the  price  a  condition  precedent, 
which  must  be  performed  before  the  title  can  pass ;  if 
the  contract  of  sale  did  not  contemplate  immediate  pay- 
ment, then  a  credit  is  implied,  and  the  title,  of  course, 
passes  on  delivery.  It  is  very  doubtful  if  this  reasoning 
be  correct.  It  is  preferable  to  say  that  the  title  does 
pass  and  the  seller  has  his  remedy  against  the  vendee. 

When  goods  are  sold  by  description,  it  is  an  implied 
condition  precedent  that  they  shall  conform  to  the 
.description  in  kind  and  usually  in  quality.  If  you 
purchase  from  X  a  car-load  of  apples,  you  will  not  be 
obliged  to  accept  oranges.  Or  if  you  bargain  for 
Florida  oranges  and  he  ships  you  California  oranges, 
you  will  not  have  to  accept  them,  because  he  has  not 
fulfilled  his  part  of  the  contract;  he  has  broken  a  con- 
dition precedent.  As  a  general  rule,  the  goods  delivered 
must  also  be  of  a  quality  equal  to  the  sample  shown 
when  the  sale  was  contracted. 

5.  Condition  Subsequent ;  Sale  or  Return.  —  Heretofore 
we  have  dealt  exclusively  with  conditions  precedent, 
the  performance  of  which  is  necessary  to  the  validity 
of  the  sale.  We  now  meet  a  different  kind  of  con- 
dition, known  as  a  condition  subsequent.  Suppose  A 
sells  a  horse  to  B,  with  the  understanding  that  if  it 
proves  unsatisfactory  it  may  be  returned  within  one 
week.  Within  the  week  the  horse  dies  without  fault 
on  B's  part.  The  chances  are  that  B  will  now  find 
the  horse  unsatisfactory  and  will  wish  to  repudiate  the 
sale.  The  question  here  presented  is  whether  the  title 
had  passed  at  once  to  B,  or  would  not  have  done  so 
until  after  the  expiration  of  the  week.     This  depends 


CONDITIONAL  SALES  165 

upon  the  exact  terms  of  the  contract.  If  it  stipulates 
that  the  title  shall  pass  immediately,  or  if  it  clearly 
appears  from  the  terms  of  the  agreement  that  the  parties 
did  intend  that  the  title  should  pass  at  once,  then  the 
sale  is  completed,  and  the  provision  for  a  return  is  a 
condition  subsequent, — that  is,  a  condition  upon  the 
performance  of  which  the  title  will  revert  to  the  vendor. 
Viewed  in  this  light,  the  title  being  in  B,  the  loss 
would  fall  upon  him,  and  he  would  be  compelled  to 
pay  for  the  horse.  Such  contracts  are,  however,  more 
frequently  deemed  to  be  contracts  of  bailment  with  an 
option  to  purchase.  During  the  week  the  horse  would, 
so  to  speak,  be  on  trial.  On  this  construction,  the 
title  would  not  pass  until  the  time  had  expired  or  the 
purchaser  had  declared  himself  satisfied.  In  this  case 
B  would  probably  be  allowed  to  repudiate  his  bargain. 


CHAPTER  V 

WARRANTIES 

1.  Express  Warranties. — A  warranty  differs  from  a 
condition  in  that  it  is  not  an  essential  element  of  the 
contract.  It  is  a  collateral  stipulation.  Its  breach 
gives  rise  to  an  action  for  damages,  but  does  not  dis- 
charge the  contract.  Warranties  are  of  two  kinds, 
express  and  implied.  An  express  warranty  is  one 
which,  as  the  name  indicates,  has  been  expressly  agreed 
upon  by  the  parties.  You  sell  me  a  suit  of  clothes  and 
warrant  it  to  be  all  wool.  It  turns  out  to  be  half 
cotton.  The  contract  is  not  broken;  the  sale  is  good; 
but  I  may  recover  from  you  any  damages  which  I  have 
suffered  by  virtue  of  the  breach  of  warranty.  It  is 
often  very  difficult  to  tell  whether  a  representation 
made  by  one  of  the  parties  is  intended  to  be  a  condi- 
tion or  a  warranty.  No  absolute  rule  for  determining 
can  be  laid  down.  The  court  will  endeavor  to  ascertain 
the  intention  of  the  parties  from  the  terms  of  the  con- 
tract. If  they  intended  it  to  be  a  term  of  contract,  it 
is  a  condition.  If  they  intended  it  to  be  a  collateral 
stipulation,  it  is  a  warranty.  Each  case  must  be  decided 
according  to  its  own  facts. 

2.  Implied  Warranties  of  Title.  —  It  is  not  always 
necessary  that  the  vendor  shall  use  express  words  to 
create  a  warranty.  In  America,  if  a  man  sells  property 
as  his  own,  even  though  he  makes  no  express  repre- 

166 


WARRANTIES    '  167 

sentations  about  it,  he  impliedly  warrants  the  title, 
i.e.  agrees  that  if  he  is  discovered  not  to  have  been  the 
owner,  he  will  make  good  any  loss  accruing  to  the  pur- 
chaser by  virtue  of  that  fact.  The  same  rule  holds  good 
in  England  at  the  present  time,  though  formerly  the 
law  was  otherwise  in  that  country. 

There  are,  however,  some  instances  where  the  buyer 
is  the  one  who  assumes  the  risk  of  the  title  proving 
valueless.  This  is  the  case  if  he  expressly  takes  this 
risk  upon  himself.  It  is  also  true  where  he  purchases 
only  the  interest  which  the  seller  has.  This  transac- 
tion is  an  assignment  rather  than  a  sale.  Again,  if  the 
purchaser  at  the  time  of  the  sale  knows  of  a  claim  in 
the  goods  possessed  by  some  third  party,  he  buys  at  his 
peril.  If  they  are  sold  at  a  time  when  they  are  not  in 
the  possession  of  the  vendor,  the  title  is  at  the  risk 
of  the  vendee ;  lack  of  possession  of  the  vendor  should 
put  the  vendee  on  inquiry.  Lastly,  whenever  goods 
are  sold  by  the  sheriff,  or  any  person  acting  in  an  offi- 
cial capacity,  he  purports  to  sell  only  what  the  previous 
owner  had ;  therefore,  the  buyer  cannot  complain  if  his 
title  is  defective. 

3.  Implied  Warranty  of  Quality.  —  Where  there  has 
been  a  sale  of  specific  goods  which  both  parties  have 
had  an  equal  opportunity  to  examine,  there  is  no 
implied  warranty  as  to  quality.  The  buyer  is  said  to 
purchase  at  his  own  risk.  "  Caveat  Emptor  "  —  let 
the  buyer  beware  —  is  the  phrase  which  expresses  the 
situation  of  the  vendee. 

But  if  the  goods  are  sold  with  the  understanding  that 
they  are  to  conform  to  a  sample  shown,  we  have  what  is 
called  a  sale  by  sample,  and  there  is  then  an  implied 
warranty  that  the  goods  shall  conform  to  the  sample 


168  '  SALES 

both  in  kind  and  quality.  The  vendor  in  such  cases  is 
bound  to  allow  the  vendee  a  fair  opportunity  to  inspect 
the  bulk,  and  if  he  finds  it  unequal  to  the  sample  he 
may  refuse  to  receive  it.  In  this  respect,  the  stipula- 
tion that  the  goods  shall  conform  to  the  sample  seems 
more  like  a  condition  than  a  warranty.  When  articles 
intended  for  food  are  exposed  for  sale  in  the  market,there 
is  an  implied  warranty  that  they  shall  be  fit  for  human 
consumption.  This  rule  is  not  recognized  in  England, 
and  not  everywhere  in  this  country.  It  is  confined  to 
cases  where  the  articles  are  sold  directly  to  the  con- 
sumer, not  when  they  are  sold  to  other  dealers. 

4.  Manufacturers'  Implied  Warranty.  —  When  goods 
have  been  purchased  from  the  manufacturer,  he  im- 
pliedly warrants  their  quality  to  the  extent  of  guaran- 
teeing them  to  have  no  latent  defects.  While  he  'does 
not  by  implication  warrant  his  wares  to  conform  to  a 
certain  standard,  yet,  even  though  the  purchaser  may 
have  inspected  the  articles  he  is  buying,  the  manu- 
facturer impliedly  warrants  them  to  contain  no  hidden 
defects  arising  from  the  process  of  manufacture. 

A  sold  B  a  large  quantity  of  flower  seeds.  Both 
parties  inspected  them,  but  of  course  neither  could  tell 
whether  they  would  grow.  They  had  been  improperly 
cultivated,  so  that  they  were  absolutely  valueless.  The 
court  decided  that  the  seller,  who  was  also  the  producer, 
should  make  good  the  loss.  Manufacturers  also  im- 
pliedly warrant  the  goods  sold  to  be  of  their  own 
manufacture  and  to  be  merchantable,  —  the  latter,  how- 
ever, only  when  the  purchaser  relies  on  the  judgment 
and  honesty  of  the  seller.  If  the  manufacturer  knows 
for  what  purpose  the  buyer  intends  to  use  the  article, 
he  impliedly  warrants  it  to  be  fit  for  that  purpose. 


CHAPTER  VI 

MUTUAL  REMEDIES  OF  THE  PARTIES 

1.  Remedies  of  Unpaid  Seller ;  Right  of  Lien.  —  Having 
discussed  the  nature  of  the  contract  of  sale,  we  shall 
briefly  examine  the  various  rights  of  the  parties,  in  case 
one  of  them  is  in  default.  In  the  first  place,  we  shall 
suppose  the  buyer  to  be  the  one  who  has  failed  to  carry 
out  his  part  of  the  agreement.  The  unpaid  vendor  has 
two  classes  of  remedies.  He  has  a  remedy  against 
the  buyer  personally,  and  he  has  certain  rights  over  the 
goods  themselves,  notwithstanding  the  fact  that  the 
title  to  them  may  have  passed  to  the  vendee. 

If  the  title  to  the  goods  which  are  the  subject-matter 
of  a  sale  has  passed  to  the  vendee,  a  mental  though  not 
an  actual  delivery  having  taken  place,  the  vendor  is 
entitled  to  retain  them  in  his  own  possession  until  he 
has  been  paid  their  price.  This  right  to  retain  them 
until  payment  is  called  his  "lien."  It  exists,  however, 
only  where  the  sale  is  for  cash.  If  the  vendor  sells  on 
credit  he  must,  on  the  demand  of  the  vendee,  give  up 
the  goods  provided  the  demand  be  made  at  a  time 
before  the  credit  has  expired;  if  the  demand  is  not 
made  until  after  the  credit  has  expired,  then  the  vendor 
may  hold  the  goods  until  payment,  just  as  he  may  where 
the  sale  is  for  cash. 

If  the  vendor  retains  the  goods  by  virtue  of  his  lien 
and  the  vendee  still  neglects  to  pay,  the  vendor  may 
sell  the  goods  to  some  third  party.     It  often  happens 

169 


170  SALES 

that  the  continued  retention  of  the  goods  would  result 
in  the  loss  of  their  value,  as  in  cases  where  they  are 
of  a  perishable  nature.  If  the  vendor  could  do  nothing 
but  hold  them  until  the  purchase  money  was  paid,  he 
would  find  himself  with  no  security  at  all  for  its  pay- 
ment. It  is  well  settled  in  America  that  the  vendor 
may  exercise  his  right  of  "resale."  When  he  does,  he 
acts  as  the  agent  of  the  vendee.  If  he  sells  for  more 
than  the  price  the  vendee  agreed  to  give,  he  must  pay 
the  excess  to  him,  less  his  own  loss.  If  he  sells  for 
less  than  the  price  he  was  to  receive,  he  is  entitled  to 
sue  the  vendee  for  the  difference. 

2.  Right  of  Stoppage  in  Transitu.  —  There  is  still 
another  right  over  the  goods  which  the  vendor  has,  not- 
withstanding the  fact  that  the  title  to  them  may  have 
passed  to  the  vendee.  This  is  a  peculiar  privilege 
known  as  the  right  of  "Stoppage  in  Transitu."  It  has 
already  been  explained  how  a  delivery  of  goods  to  a 
railroad  or  to  any  "common  carrier,"  is  a  delivery  to 
the  vendee  and  operates  to  pass  the  title;  but  even  then 
the  vendor  has  a  right  to  retake  the  goods  while  they 
are  on  the  way,  if  he  does  so  before  they  have  actually 
come  into  the  possession  of  the  vendee.  This  right 
may  be  exercised  only  when  the  vendee  has  become 
insolvent  and  the  vendor  would,  in  all  probability,  be 
unable  to  collect  the  price  of  his  shipment. 

A,  in  New  York,  sold  a  bill  of  goods  to  B,  in  Rio 
Janeiro.  They  were  shipped  on  the  brig  Betsy  Jane. 
Two  days  after  the  vessel  sailed,  A  was  advised  by  cable 
that  B  had  become  a  bankrupt.  He  thereupon  author- 
ized his  agent  to  meet  the  brig  in  the  harbor  of  the  city 
and  to  notify  her  captain,  before  the  vessel  came  to 
anchor,  not  to  deliver  the  goods  to  the  consignee.    This 


MUTUAL  REMEDIES  OF  THE  PARTIES  171 

was  done,  and  B's  assignee  in  bankruptcy,  who  could 
claim  all  of  B's  property,  had  no  rights  over  the  cargo. 
It  is  essential  that  the  goods  be  intercepted  in  transitu. 
If  they  reach  their  ultimate  destination  before  the  order 
reaches  the  carrier,  the  title  has  passed  absolutely  and 
the  vendor  has  lost  all  his  rights  in  the  goods  them- 
selves. It  has  been  decided  that  if  the  vessel  comes 
to  anchor  in  the  port  of  destination,  the  journey  of  the 
goods  is  at  an  end,  and  the  order  will  then  be  too  late. 

3.  Remedies  of  Vendor  against  Vendee  Personally.  —  We 
have  discussed  so  far  only  the  remedies  which  the 
vendor  has  over  the  goods  which  were  the  subject- 
matter  of  the  sale,  and  the  title  to  which  had  passed  to 
the  vendee,  although  they  were  still  in  the  physical 
possession  of  the  vendor.  In  cases  where  the  title  has 
not  passed,  obviously  the  vendor  is  at  full  liberty  to  do 
what  he  pleases  with  the  goods.  Until  he  is  paid,  he 
cannot  be  compelled  to  give  them  up.  But  now  we 
come  to  the  situation  where  the  title  has  passed  and  the 
goods  have  been  actually  delivered  into  the  possession 
of  the  vendee.  In  such  a  case  the  vendor  has  no 
remedy  against  the  goods  — he  must  sue  the  vendee  for 
their  price.  If  the  vendee  refuses  to  accept  the  goods, 
having  decided  to  repudiate  his  bargain,  the  vendor 
may  sue  him,  not  for  the  price  of  the  goods,  for  the 
title  has  not  passed,  but  for  damages  arising  from  the 
breach  of  contract.  He  may  recover  a  sum  sufficient 
to  compensate  him  for  all  the  loss  sustained  on  account 
of  the  breach,  provided  that  loss  could  reasonably  be 
expected  to  result  from  it. 

4.  Remedies  of  Vendee  where  Vendor  refuses  to  Perform. 
—  We  now  reverse  the  situation,  — suppose  the  vendor 
to  be  in  default,  and  ask  what  are  the  remedies  of  the 


172  SALES 

vendee.  If  the  vendor  has  refused  to  perform  his  part, 
and  the  vendee  has  suffered  loss  in  consequence,  the 
latter  may  sue  the  former  for  damages  for  breach  of  con- 
tract. The  amount  recoverable  is  the  amount  of  actual 
loss  naturally  resulting  from  the  breach.  If  the  vendee 
has  been  compelled  to  go  into  the  market  and  pay  a 
higher  price  for  the  same  goods,  he  may  recover  the 
difference  between  the  price  which  he  actually  paid,  and 
the  amount  he  would  have  paid  had  he  bought  accord- 
ing to  the  contract. 

Again,  suppose  that  the  contract  of  sale  has  been  com- 
pleted so  that  the  title  to  the  goods  has  passed  to  the 
vendee,  but  that  the  vendor  refuses  to  deliver  them  to 
him.  If,  in  any  case,  one  man  is  the  owner  of  property 
and  some  one  else'  wrongfully  takes  it  from  him  or 
destroys  it,  or  if,  having  possession  of  it  rightfully,  he 
wrongfully  appropriates  it  to  his  own  use,  he  may  be 
sued  for  its  value  —  he  has  been  guilty  of  the  wrong 
known  as  "conversion."  If  the  title  to  goods  which 
are  the  subject-matter  of  a  sale  has  passed  to  the  vendee, 
and  the  vendor  wrongfully  refuses  to  give  them  up, 
he  has  wrongfully  appropriated  to  his  own  use  property 
belonging  to  the  vendee,  and  the  latter  may  sue  him  and 
recover  its  full  value,  with  damages  for  its  detention. 

5.  Suit  for  Specific  Performance.  —  Another  remedy 
which  may  be  resorted  to  by  the  vendee,  is  a  suit  in 
equity  for  the  specific  performance  of  the  contract  of  sale. 
This  remedy  is  equally  open  to  both  parties,  but,  as  a 
rule,  damages  will  compensate  a  vendor  for  his  loss, 
since  all  that  he  can  lose  will  be  the  profits  of  the  sale. 
But  sometimes  damages  will  not  compensate  the  vendee, 
and,  as  we  saw  when  we  were  discussing  contracts,  if 
damages   will  not  compensate   a  man  for  a  breach  of 


MUTUAL  REMEDIES  OF  THE  PARTIES  173 

contract,  he  may  go  into  equity  and  force  the  opposite 
party  to  carry  it  out  specifically.  This  rule  applies  to 
contracts  of  sale,  as  well  as  to  other  contracts.  If  the 
article  to  be  sold  is  of  such  a  nature  that  damages 
cannot  compensate  the  vendee  for  its  loss,  then  he  may 
specifically  enforce  it. 

B  was  a  dealer  in  fish.  The  fish-skins  and  offal  were 
valuable  for  the  manufacture  of  glue.  A  offered  to  put 
up  a  glue  factory  and  purchase  all  of  B's  fish,  if  the  latter 
would  enter  into  a  contract  to  sell  him  all  the  skins 
and  offal  at  a  certain  specified  price  for  a  long  term  of 
years.  The  contract  was  made,  the  factory  erected,  and 
all  went  smoothly  until  a  third  party  came  along  and 
offered  B  a  higher  price.  He  then  refused  to  sell  to  A 
any  longer.  A  went  into  equity  and  asked  for  specific 
performance.  The  court  granted  it.  They  said  no 
damages  could  compensate  A  for  the  loss  of  his  busi- 
ness, and  that  would  have  been  the  result  of  B's 
continued  refusal  to  perform,  because  no  other  fish- 
skins  could  be  purchased  anywhere  within  reach  of  A's 
factory. 

Whenever  the  article  contracted  to  be  sold  is  of 
peculiar  value  to  the  plaintiff,  so  that  its  loss  cannot 
be  compensated  by  money  alone,  the  court  will  specif- 
ically enforce  the  sale.  Thus,  a  sale  of  a  valuable 
altar-piece,  treasured  as  an  heirloom,  was  enforced 
in  equity  by  the  vendee,  who,  being  a  member  of  the 
family  in  which  the  heirloom  belonged,  had  a  special 
reason  for  desiring  to  purchase  it.  Money  alone  would 
not  compensate  him  for  its  loss.  No  other  like  it  could 
be  purchased. 

6.  Remedies  of  Vendee  for  Breach  of  Warranty.  —  So  far 
we   have   dealt  only  with  remedies   for  a  breach  of 


174  SALES 

the  contract  of  sale.  But  while  that  agreement  has 
been  performed,  there  may  have  been  a  breach  of  some 
collateral  stipulation,  termed  a  "warranty."  If  the 
sale  has  been  completed  and  the  goods  delivered  to 
the  vendee,  he  may  not,  as  a  rule,  tender  them  back  and 
refuse  to  pay  for  them,  upon  discovering  that  they  are 
not  equal  to  the  warranty.  He  may  sue  for  damages 
for  breach  of  the  warranty  and  recover  any  loss  suffered 
therefrom,  or  he  may  set  up  such  damage  in  defence, 
when  he  is  sued  for  the  purchase  price,  and  will  then 
be  required  to  pay  the  difference  only.  If  the  contract 
of  sale  has  not  yet  been  performed,  that  is,  if  the  goods 
have  not  yet  been  delivered,  and  the  vendee  finds  out 
by  an  examination  of  them  that  they  do  not  equal  in 
quality  the  sample  to  which  they  were  to  conform,  or  if 
he  finds  that  they  do  not  answer  to  the  description  given 
of  them,  he  is  then  usually  at  liberty  to  refuse  to  accept 
them.  He  may  do  this,  however,  only  in  cases  where 
the  stipulation  as  to  quality  really  partakes  of  the 
nature  of  a  condition.  In  the  case  of  an  ordinary  war- 
ranty, his  only  remedy  is  either  a  suit  for  damages  or  a 
reduction  of  the  price  by  the  amount  of  his  loss. 


PAET   IV 
NEQOTIABLE  CONTRACTS 


CHAPTER  I 


ESSENTIAL  CHARACTERISTICS  OF  A  PROMISSORY 
NOTE 

1.  General  Nature  of  Negotiable  Contracts.  —  Having 
completed  the  discussion  of  the  general  nature  and  for- 
mation of  contracts  and  the  more  particular  discussion 
of  sales,  we  will  now  investigate  "negotiable  contracts." 
These  contracts  are  always  written.  They  consist  of 
"Promissory  Notes  "and  "Bills  of  Exchange,"  usually 
termed  drafts  by  merchants.  Their  peculiar  feature 
is  the  fact  that  they  may  be  transferred  at  will  from 
one  person  to  another.  They  circulate  from  hand  to 
hand  almost  as  freely  as  money,  and  this  is  what  we 
mean  when  we  use  the  word  "negotiable."  When  one 
transfers  a  contract  of  this  nature  to  some  one  else,  he 
is  said  to  negotiate  it. 

2.  Custom  of  Merchants.  —  The  rules  which  govern 
this  particular  class  of  contracts  were,  in  the  first 
instance,  derived  from  a  certain  branch  of  law  which  is 
usually  referred  to  as  the  "Custom  of  Merchants." 
When  commerce  began  to  be  one  of  the  most  important 
means  of  livelihood,  it  became  necessary  that  certain 

175 


176  NEGOTIABLE  CONTRACTS 

rules  or  laws  common  to  all  countries  should  be  laid 
down  to  govern  transactions  between  merchants  who 
lived  in  different  sections  of  the  world.  A  merchant 
in  England  trading  with  a  merchant  in  Italy  would, 
in  case  of  a  dispute  between  them,  be  sure  to  get  into 
difficulties  over  the  question  as  to  which  law  was  to 
govern  the  transaction.  In  order  to  obviate  these  dif- 
ficulties to  some  extent,  the  rules  comprised  in  the 
"  Custom  of  Merchants  "  were  evolved. 

Among  the  most  important  of  these  rules  are  those 
which  govern  the  purchase  and  sale  of  negotiable  paper. 
When  business  men  in  different  parts  of  the  world  are 
dealing  with  each  other,  they  use  bills  of  exchange  and 
promissory  notes  almost  exclusively  for  transferring 
values.  While  the  common  law  now  governs  these 
instruments  and  the  various  situations  which  arise  in 
connection  with  them,  it  is  interesting  to  know  that 
the  common  law  decisions  were  originally  based  upon 
this  peculiar  system  of  rules  which  we  have  referred 
to  as  the  "Custom  of  Merchants."  Laws  governing 
negotiable  paper  and  other  transactions  which  particu- 
larly concern  merchant  and  merchant  are,  therefore, 
very  much  the  same  the  world  over,  because  the  laws 
in  all  countries  were  founded,  to  a  greater  or  less 
extent,  upon  this  same  system  of  rules. 

3.  Definition  of  a  Promissory  Note.  —  Negotiable  con- 
tracts consist  of  promissory  notes  and  bills  of  exchange. 
The  first  thing  to  determine  is  what  instruments  are 
bills  and  what  are  notes.  Having  ascertained  the  char- 
acter of  the  paper,  we  are  then  in  a  position  to  apply 
the  rules  peculiar  to  it.  A  promissory  note  is  a 
written,  unconditional  promise,  made  by  one  or  more 
parties,  to  pay  a  certain  sum  of  money  to  the  order  of 


CHARACTERISTICS  OF  A  PROMISSORY  NOTE      177 

some  other  party  or  parties,  at  a  definite  time.  The 
one  who  promises  to  pay  by  affixing  his  signature  to 
the  instrument  is  called  the  "maker"  of  the  note;  the 
one  to  whom  the  money  is  to  be  paid  is  called  the 
"payee."  Hereafter  when  we  refer  to  the  man  who 
promises  we  shall  call  him  the  "maker,"  and  when  we 
refer  to  the  one  to  whom  the  promise  is  made,  we  shall 
call  him  the  "payee."  The  usual  form  of  a  promissory 
note  is  as  follows :  — 


/  500.  MCUd&t/LkU.   June  7   /8<?  9 

Eight  months        aite*  dat&    I  jiAxyvrvutf,  to  fiau 
to  tA&  o'uLea,  oi  S.  H.  White, 


Five  Hundred 


_JbottaA&, 


the  Merchants'  Bank  of  Philadelphia 


with  interest  at  6%. 


KKthotot  cCeiat^atCofv,  iov  value,  i&^&vo&d. 

o4-o.    410.    Au&    2/7/1900.  John  H.  Waite. 


4.  Note  must  contain  a  Promise.  —  We  must  discuss 
more  particularly  the  essential  elements  of  a  promissory 
note,  which  are  only  briefly  indicated  in  the  definition. 
In  the  first  place,  it  must  contain  an  unconditional 
promise  to  pay.  The  point  to  be  insisted  upon  is,  that 
the  words  must  constitute  a  promise  of  payment,  as  dis- 
tinguished from  a  request  or  a  mere  recognition  of  an 
existing  debt.  Thus,  a  written  instrument  saying,  "  I 
O  U  eight  guineas,"  was  decided  not  to  constitute  a 
promise, —  it  merely  admitted  the  indebtedness  of  the 


178  NEGOTIABLE  CONTRACTS 

signer.  On  the  other  hand,  the  words,  "IOU  twenty 
pounds,  to  be  paid  on  demand,"  would  have  constituted 
a  promise.  The  phrase  "  to  be  paid  on  demand  "  con- 
tains a  clear  indication  that  the  maker  of  the  note  con- 
siders himself  to  be  bound  to  pay  at  the  instance  of 
the  opposite  party. 

5.  Promise  must  be  Unconditional. — Not  only  must 
the  promise  be  an  actual  promise  as  distinguished  from 
a  request,  or  an  acknowledgment  of  indebtedness,  but 
it  must  be  an  unconditional  one.  A  paper  reading, 
"I  promise  to  pay  one  hundred  dollars  if  my  brother 
does  not,"  would  not  constitute  a  promissory  note. 
The  promise  is  here  conditional  upon  the  failure  of  the 
brother  of  the  maker  to  pay  the  amount.  It  is  really 
an  undertaking  by  one  man  to  be  surety  for  another. 
A  gave  B  an  instrument  which  read,  "  I  promise  to  pay 
one  hundred  dollars  out  of  the  income  of  my  farm." 
That  instrument  could  not  be  a  negotiable  note.  The 
promise  was  conditional  upon  the  income  arising  from 
the  farm ;  there  might  be  no  income,  in  which  case  there 
would  be  no  obligation  to  pay. 

6.  Promise  must  be  Single.  —  Not  only  must  the  note 
contain  a  promise  which  is  unconditional,  but  it  must 
contain  no  other  promise  or  agreement  on  the  part  of 
the  maker,  beyond  that  of  payment.  To  constitute  a 
negotiable  contract,  the  law  requires  that  it  shall  con- 
tain but  a  single  promise.  It  is,  of  course,  entirely 
possible  to  have  a  paper  which  contains  more  than  one 
promise  and  which  will  bind  the  maker;  but  such  an 
instrument  will  not  possess  the  character  of  negotia- 
bility unless  it  conforms  in  all  respects  to  the  essential 
elements  which  we  are  now  enumerating.  When  we 
say  a  certain  instrument  is  not  a  promissory  note,  we 


CHARACTERISTICS  OF  A  PROMISSORY  NOTE      179 

mean  merely  that  it  is  not  a  negotiable  instrument.  A 
signed  an  instrument  in  which  he  agreed  to  pay  B  the 
sum  of  five  hundred  dollars,  and  also  to  deliver  up  to 
B  certain  horses  in  his  possession.  The  instrument 
was  decided  not  to  be  a  promissory  note  because  it 
contained  not  only  a  promise  to  pay  money,  but  also 
a  promise  to  do  something  else,  which  destroyed  its 
negotiability. 

7.  Promise  must  be  for  the  Payment  of  Money.  —  If  the 
promise  contained  in  the  note  is  a  promise  to  pay  some- 
thing other  than  money,  as  a  promise  to  deliver  one 
hundred  bushels  of  potatoes,  the  instrument  is  not 
negotiable.  By  "  money "  is  meant  the  medium  of 
exchange  which  is  legal  tender  at  the  place  where  the 
note  is  to  be  paid.  If  I  execute  an  instrument  in 
which  I  agree  to  pay  you  one  hundred  Spanish  milled 
dollars,  that  would  not  be  a  promissory  note,  as  Span- 
ish milled  dollars  are  not  legal  tender  in  this  country. 
This  contract  would  be  an  agreement  to  deliver  a  spe- 
cific chattel.  The  promise  in  the  United  States  is 
ordinarily  to  pay  in  dollars,  but  a  promise  to  pay  spe- 
cifically in  United  States  currency,  or  in  silver  dollars, 
or  in  gold  dollars,  would  constitute  a  negotiable  con- 
tract, for  all  of  these  are  money,  since  they  are  legal 
tender  in  this  country.  A  promise,  on  the  other  hand, 
to  pay  in  the  United  States  one  hundred  pounds  of 
English  money  would  not  constitute  a  promissory  note. 

8.  Amount  and  Time  of  Payment  must  be  definite.  —  The 
amount  named  in  the  note  must  be  a  definite  one. 
There  must  be  no  uncertainty  as  to  the  obligation  of 
the  maker.  If  I  execute  an  instrument  by  which  I 
obligate  myself  to  pay  you  five  hundred  dollars  one 
year  from  date,  and  all  other  sums  which  at  that  time 


180  NEGOTIABLE  CONTRACTS 

I  may  be  owing  to  you,  it  would  not  be  negotiable 
because  the  obligation  of  the  maker  is  uncertain.  If 
such  an  instrument  were  negotiable,  that  is,  if  it  could 
circulate  like  money,  it  would  give  rise  to  a  great  deal 
of  inconvenience,  because  the  persons  who  might  pur- 
chase it  would  not  know  how  much  it  was  worth  to 
them.  Inasmuch  as  such  paper  is  intended  to  pass 
through  the  hands  of  a  number  of  people,  it  should  con- 
tain on  its  face  an  exact  statement  of  its  value.  No 
article  could  be  a  successful  medium  of  exchange  unless 
this  were  true,  because  no  one  would  know  whether  or 
not  he  could  accept  it  in  payment  for  value  delivered. 
That  is  the  reason  business  becomes  practically  bank- 
rupt when  paper  money  which  is  in  circulation  becomes 
of  doubtful  value.  Business  men  will  not  accept  it 
because  they  do  not  know  how  much  it  is  worth.  If, 
therefore,  the  amount  of  the  note,  or  the  character  of 
the  promise,  or  the  time  of  payment  be  uncertain,  the 
law  will  not  treat  it  as  being  a  negotiable  contract.  A 
young  man  who  had  gotten  into  debt  desired  to  raise 
money  to  discharge  his  obligations ;  he  was  his  father's 
heir,  and  gave  a  note  to  a  money-lender  in  which  he 
agreed  to  pay  him  a  certain  amount  of  money,  "  ten  days 
after  the  death  of  my  father."  The  note  was  not 
negotiable;  for,  while  it  was  perfectly  certain  that  the 
time  would  eventually  arrive  when  the  note  would  fall 
due,  yet  no  one  could  tell  how  long  a  period  might 
intervene  prior  to  that  day. 

9.  Parties  must  be  definite  and  Words  of  Negotiability 
present.  —  In  order  that  all  the  elements  of  negotiability 
may  attach,  it  must  clearly  appear  upon  the  face  of  the 
instrument  who  is  the  payee  and  who  is  the  maker  of 
the  note,  otherwise,  as  you  can  readily  see,  there  would 


CHARACTERISTICS  OF  A  PROMISSORY  NOTE      181 

be  no  means  of  determining  its  value,  as,  after  all,  the 
chief  point  to  be  considered  is  the  responsibility  of  the 
maker. 

Even  if  the  preceding  elements  be  present,  still 
the  obligation  will  not  be  negotiable  unless  there  be 
words  of  negotiability;  that  is,  words  indicating  the 
purpose  of  the  parties  that  the  paper  shall  be  transfer- 
able from  hand  to  hand.  The  usual  words  are,  as  may 
be  seen  from  the  form  given  above,  "or  order,"  or 
"pay  to  the  order  of,"  thus  indicating  that  the  maker 
agrees  to  pay  to  any  one  designated  by  the  payee.  Or 
the  note  may  read  "Pay  to  John  Smith  or  bearer,"  in 
which  case  any  one  who  has  possession  of  the  note  may 
collect  it  from  the  maker.  It  is  not  absolutely  neces- 
sary to  use  these  exact  words,  but  some  words  indicat- 
ing negotiability  must  be  present. 

When  all  these  elements  are  combined  in  one  instru- 
ment, we  have  what  is  technically  called  a  promissory 
note.  As  we  shall  see  hereafter,  there  is  a  great  differ- 
ence between  the  obligation  of  parties  to  an  instrument 
which  is  technically  a  promissory  note,  and  the  parties 
to  an  instrument  which  is  an  ordinary  promise  to  pay. 
In  the  one  case  the  liability  of  the  parties  is  governed 
by  the  peculiar  rules  which  we  have  above  referred  to, 
founded  upon  the  "  Custom  of  Merchants  " ;  in  the  other 
case  their  liability  is  governed  solely  by  the  common 
law  rules  relating  to  contracts. 


CHAPTER  II 

ESSENTIAL   CHARACTERISTICS  OF  A  BILL  OF 
EXCHANGE 

1.  The  Purpose  of  a  Bill  of  Exchange.  —  We  now  come 
to  the  second  kind  of  negotiable  contracts,  which  are 
known  as  "Bills  of  Exchange."  The  purpose  of  a  bill 
of  exchange  is  to  enable  merchants  in  different  parts 
of  the  world  to  pay  for  goods  which  they  have  pur- 
chased, without  actually  shipping  the  money  to  their 
creditors.  If  A,  a  merchant  in  New  York,  desires  to 
pay  various  merchants  in  England  for  consignments 
of  goods  shipped  to  him,  and  should  send  the  cash 
to  each  one,  it  would  involve  a  great  deal  of  trouble, 
as  he  would  be  obliged  to  purchase  English  money 
here,  or  else  ship  American  money  to  England  for  the 
purchase  of  English  money,  with  which  to  pay  the 
debt.     In  either  case  he  must  bear  the  cost  of  shipment. 

To  obviate  this  he  makes  a  permanent  arrangement 
with  a  banker,  say  in  London.  He  deposits  funds  with 
him  or  obtains  a  "  line  of  credit."  Then  when  he  desires 
to  pay  for  a  consignment  of  goods,  he  sends  to  the  foreign 
dealer  a  bill  of  exchange.  This  bill  of  exchange  is  a 
written  order  to  his  banker,  directing  him  to  pay  to  the 
order  of  X,  the  merchant,  the  amount  of  the  bill.  The 
latter  then  goes  to  the  banker  and  presents  the  bill  to 
him.  If  everything  is  correct  and  the  banker  has  funds 
of  the  New  York  merchant  for  that  purpose,  he  writes 
across  the  face  of  the  bill  "Accepted,"  with  the  date, 
and  signs  his  name.     He  then  puts  aside  enough  money 

182 


CHARACTERISTICS  OF  A  BILL  OF  EXCHANGE     183 

belonging  to  the  New  York  merchant  to  meet  this  bill 
when  due.  When  that  date  arrives  he  pays  the  amount 
named  in  the  instrument. 

2.  Essentials  of  a  Bill  of  Exchange.  — A  bill  of  exchange 
may  be  defined  as  a  written  order  by  which  A  directs 
B  to  pay  a  certain  sum  of  money,  named  therein,  to  the 
order  of  C.  A,  who  signs  the  order,  is  called  the 
drawer;  B,  the  banker  to  whom  the  order  is  directed, 
is  called  the  drawee  until  he  accepts,  after  which  he  is 
called  the  acceptor.  The  party,  C,  to  whom  the  money 
is  to  be  paid  is  called  the  payee.  Bills  of  exchange 
which  are  to  be  sent  across  the  sea,  or  to  far  distant 
points, are  usually  issued  in  "duplicate"  or  in  "tripli- 
cate." That  is,  three  copies  of  the  same  instrument 
are  executed,  each  one  being  numbered  and  containing 
a  statement  that  if  it  be  paid  first,  the  other  two  are 
not  to  be  paid.  The  one  which  first  comes  to  hand  is 
then  used,  and  the  others  become  of  no  validity.  The 
usual  form  of  such  a  bill  is  as  follows :  — 


€'X&ha,'vuf&  f-o-i    £1000  Stg. 

Philadelphia,  Oct.  7    18  99 

Thirty  days  after  sight  pi    thU>    ^et&yut 

o-i   <o9CeAariae  (itiat  aruL  tA*t>vcl  ot  &amve>  t&n&v  a/ncl 

da,t&  wviJmxLgC)    jowif  to  tk&  oicC&v  o^     John  Smith 

One  Thousand  Pounds  Sterling  Ip^  v«sLo& 

v&&&tv-&ci,  unci  4i<la&&  the,  ^cume,  to  tk&  a^eount  oy 

$0-   M.  M.  Brown  8c  Sons,     1  _  _ 

= — = — —  \         Henry  Jones. 

Bankers,  London,  England.  j 

cAo.  892 


184  NEGOTIABLE   CONTRACTS 

The  one  given  is  No.  2.  The  others  would  be  just  like 
it,  except  the  numbers.  The  observations  which  were 
made  concerning  the  essential  characteristics  of  a 
promissory  note,  will  also  apply  to  a  bill  of  exchange. 
It  must  contain  an  absolute  order,  not  a  mere  request. 
"  Mr.  A  will  much  oblige  Mr.  B  by  paying  Mr.  C  one 
hundred  dollars,"  would  not  be  a  bill  of  exchange.  If 
the  words  "or  order"  were  present,  however,  this 
would  be  deemed  a  sufficient  indication  of  an  absolute 
order,  and  the  instrument  would  be  negotiable.  As  in 
the  case  of  the  promissory  note,  the  bill  must  be  for 
the  payment  of  money  and  the  order  must  not  be  coupled 
with  an  order  to  do  something  else.  It  must  be  definite 
as  to  amount  and  time  of  payment  and  identity  of  the 
parties,  and  must  contain  words  of  negotiability. 

3.  Bill  or  Note  not  Complete  until  Delivered. —  A  bill 
or  note  does  not  become  binding  until  it  has  been 
delivered  to  the  proper  parties.  Suppose  I  write  out 
and  sign  a  promissory  note  in  your  favor,  but  retain  it 
in  my  own  possession,  intending  to  give  it  to  you 
at  some  future  time,  when  you  are  to  deliver  to  me 
a  sum  of  money.  While  the  note  is  still  in  my  posses- 
sion it  is  of  no  binding  force  upon  me,  as  I  have  not 
really  completed  the  execution  of  it  until  I  deliver  it  to 
you.  The  same  rule  applies  to  a  bill  of  exchange; 
until  it  is  sent  to  the  payee  it  confers  no  rights  upon 
any  of  the  parties. 

4.  Ambiguous  Instruments.  —  It  sometimes  happens 
that  a  paper  is  drawn  in  such  a  way  that  it  is  difficult 
to  tell  what  it  really  is.  In  such  a  case  the  court  will 
interpret  the  instrument  as  nearly  as  may  be  according 
to  the  intention  of  the  parties.  If  it  is  of  the  opinion 
that   they   intended  the    instrument   to   be   a   bill   of 


CHARACTERISTICS  OF  A  BILL  OF  EXCHANGE     185 

exchange,  it  will  so  construe.  If  it  is  of  the  opinion 
that  they  intended  it  to  be  a  promissory  note,  it  will 
construe  it  to  be  one.  A  wrote  an  instrument  in  the 
following  form,  which  he  gave  to  C :  — 

Oct.  9, 1901. 
ToB. 

I  promise  to  pay  to  the  order  of  C  one  hundred  dollars, 
two  months  after  date. 

(Signed)  A. 

The  question  was  whether  this  was  a  promissory  note 
or  a  bill  of  exchange.  It  had  been  presented  to  B,  and 
B  had  written  his  name  across  it,  accepting.  It  was 
argued  that  A  meant  to  order  B  to  pay  one  hundred 
dollars  to  C,  but  that  he  ignorantly  wrote,  "  I  promise 
to  "  before  pay,  and  these  words  should  be  disregarded. 
On  the  other  hand,  it  was  pointed  out  that  the  body  of 
the  instrument  contained  a  clear  promise  to  pay  on  the 
part  of  A,  and  the  fact  that  the  instrument  was  directed 
to  B,  and  that  he  accepted  it,  made  no  difference. 
The  court  decided  that  the  holder  might  elect  to  treat 
it  as  either,  and  as  he  had  sued  upon  it  as  a  bill  of 
exchange,  he  was  allowed  to  recover  upon  that  theory. 

In  both  bill  and  note  the  essential  words  are  the  order 
or  promise,  the  words  of  negotiability,  and  the  signa- 
ture. Everything  else  may  be  dispensed  with  without 
destroying  the  negotiable  character  of  the  paper.  The 
date  may  be  proven  by  oral  evidence;  if  no  time  is 
stated  in  the  instrument  it  is  payable  on  demand.  Even 
the  name  of  the  payee  may  be  omitted,  in  which  case 
the  bill  or  note  is  payable  to  bearer,  but  the  other 
characteristics  must  be  present. 


CHAPTER  III 

HOW  THE  ACCEPTANCE   MUST  BE  MADE 

1.  The  Acceptance  should  be  made  in  Writing  across  the 
Face  of  the  Bill.  —  The  bill  of  exchange  should  be  pre- 
sented to  the  person  to  whom  it  is  directed,  the  drawee. 
If  he  has  funds  of  the  drawer  for  that  purpose  he  prom- 
ises to  pay  the  amount,  when  due,  and,  to  indicate  that 
fact,  writes  his  name  across  the  face  of  the  bill.  This 
act  is  called  his  "acceptance."  From  that  time  he  is 
called  the  "acceptor."'  Should  the  drawee  for  any 
reason  fail  or  refuse  to  accept  the  bill,  it  is  said  to  be 
dishonored,  and  the  holder  may  charge  the  drawer  with 
the  amount.  That  phase  of  the  question  will  be  dis- 
cussed later;  the  question  immediately  before  us  is, 
How  may  the  acceptance  be  made? 

It  should,  as  a  rule,  be  made  in  writing  across  the 
face  of  the  instrument.  This  is  not,  however,  alwaj^s 
necessary.  In  England  all  bills  of  exchange  must  be 
accepted  in  writing.  In  this  country  different  rules 
prevail  in  the  different  states.  In  Pennsylvania  all 
bills  of  exchange  for  amounts  greater  than  twenty 
dollars  must  be  accepted  in  writing;  but  bills  for  a 
less  amount  may  be  accepted  orally.  Nearly  all  states 
have  similar  statutory  rules.  In  some  parts  of  this 
country  a  separate  promise  to  pay  a  bill  of  exchange 
which  has  not  yet  been  drawn  up,  will  bind  the 
acceptor.     Suppose  I  wish  to  draw  a  bill  of  exchange 

186 


HOW  THE   ACCEPTANCE   MUST   BE   MADE  187 

upon  you,  and  I  write  you  a  letter  asking  if  you  will 
pay  such  a  bill  in  case  I  draw  it.  You  write  back, 
saying  that  you  will.  I  then  draw  up  the  bill,  direct- 
ing it  to  you.  That  promise  of  yours  will  bind  you  in 
some  states  in  this  country,  but  not  in  others.  In  Eng- 
land it  will  not  bind  you.  There  are  statutory  regula- 
tions concerning  this  matter  in  a  number  of  the  states. 
2.  What  the  Acceptance  Means.  —  By  the  act  of  writ- 
ing his  name  across  the  face  of  the  bill,  the  drawee 
promises  to  pay  the  amount.  This  promise  is  the 
essential  part  of  the  acceptance,  and  while  the  latter 
may  be  made  in  an  informal  manner,  it  must  clearly 
contain  this  promise  to  pay.  If  the  drawee  accepts 
conditionally,  he  makes  a  conditional  promise  to  pay, 
which  may  or  may  not  destroy  the  negotiability  of  the 
instrument,  depending  upon  its  nature.  If  the  drawee 
accepts  before  the  date  of  payment,  he  promises  to  pay 
when  that  time  arrives.  If  he  accepts  after  the  date  of 
payment,  he  promises  to  pay  on  demand.  The  only 
proper  person  to  accept  a  bill  of  exchange  is  the  one  to 
whom  it  is  addressed,  viz.,  the  drawee;  if  a  stranger 
should  accept  a  bill  he  might  be  held  responsible  for 
his  promise  to  pay,  but  the  instrument  would  lose  its 
negotiable  character. 


CHAPTER  IV 

HOW  NEGOTIABLE   PAPER  CIRCULATES 

1.  Indorsement  Necessary.  —  It  has  already  been 
pointed  out  that  promissory  notes  and  bills  of  exchange 
circulate  from  hand  to  hand  almost  as  freely  as  money. 
This  is  the  peculiar  function  of  negotiable  contracts, 
and  they  are  made  with  the  express  purpose  of  perform- 
ing this  service.  There  is,  however,  a  difference  be- 
tween the  manner  in  which  money  circulates,  and  the 
manner  in  which  negotiable  paper  circulates.  Money 
changes  hands  and  ownership  merely  by  delivery.  If 
I  desire  to  pay  you  a  debt  of  one  hundred  dollars  and 
hand  you  one  hundred  dollars  in  United  States  cur- 
rency, the  title  to  the  currency  passes  to  you  by  the  act 
of  delivery.  It  is  not  necessary  for  me  to  put  my  name 
on  the  paper  or  to  go  through  a  formality  of  any  kind. 
But  if  I  am  the  payee  of  a  bill  of  exchange,  and  the  bill 
reads :  — 

June  26,  1901. 

To  A. 

Ninety  days  after  date  pay  one  hundred  dollars  to  B, 

or  order. 

(Signed)  C. 

On  the  face  of  the  instrument,  B  is  the  one  who  is 
entitled  to  the  one  hundred  dollars.  If  B  wishes  to 
pay  a  debt  which  he  owes  X,  and  desires  to  pay  it  with 
this  bill  of  exchange,  he  cannot  simply  hand  the  bill 
over  to  X,  for  if  X  should  present  the  bill  he  could  not 

188 


HOW  NEGOTIABLE   PAPER  CIRCULATES  189 

get  the  money,  as  A  is  not  ordered  to  pay  it  to  him. 
But  this  is  negotiable  paper  and  does  circulate  from 
hand  to  hand.  How,  then,  shall  B  get  over  his  diffi- 
culty ?  He  writes  on  the  back  of  the  instrument,  "  To 
A,  Pay  the  within  to  X  or  order,  (signed)  C."  Or  he 
may  simply  write,  "Pay  to  X  or  order,"  or,  in  some 
cases,  merely  sign  his  name  on  the  back.  If  he  does 
the  latter,  he  is  said  to  indorse  the  bill  or  note  in  blank, 
and  by  so  doing  he  orders  the  acceptor  or  maker,  as  the 
case  may  be,  to  pay  the  amount  of  the  instrument  to 
the  bearer.  The  latter  may,  if  he  chooses,  fill  in  his 
own  name,  so  that  it  will  appear  that  the  original 
indorsement  was  made  to  his  order. 

2.  How  the  Indorsement  should  be  Made.  —  When  the 
holder  of  a  note  writes  on  the  back  of  it  an  order  direct- 
ing the  maker  to  pay  the  amount  to  some  other  person, 
his  action  is  called  "  indorsing  "  the  note.  His  signa- 
ture on  the  back  is  his  indorsement ;  by  putting  it  there 
he  has  subjected  himself  to  certain  liabilities,  which  we 
will  discuss  later.  After  this  time  he  is  called  an  "in- 
dorser,"  and  the  one  to  whom  he  has  indorsed  the  bill 
is  called  an  "indorsee." 

The  indorsement  must  be  in  writing  on  the  bill  or 
note.  This  is  an  absolute  rule.  If  the  indorsee  wishes 
to  transfer  it  to  some  other  person,  he  may  indorse  it 
over  to  him  in  the  same  way,  and  the  second  indorsee 
may  do  the  same  to  still  another,  and  so  on.  The  only 
person  who  can  properly  indorse  a  bill  or  note  is  the 
one  who  at  that  time  is  the  owner  of  it.  Obviously, 
this  may  be  either  the  payee  himself  or  some  subse- 
quent indorsee,  as  no  one  else  can  be  the  owner  and  no 
one  but  the  owner  can  transfer  the  title  to  another 
person. 


190  NEGOTIABLE   CONTRACTS 

A.  Irregular  Indorsers.  —  It  sometimes  happens,  how- 
ever, that  a  stranger  to  the  instrument  will  put  his 
name  on  the  back  of  it  to  give  it  credit.  Suppose  a 
promissory  note  is  executed  in  the  following  form :  — 

Two  months  after  date  I  promise  to  pay  to  the  order 
of  A  two  hundred  dollars. 

(Signed)  B. 

A  wishes  to  negotiate,  or,  in  other  words,  to  sell  the 
note,  in  order  to  raise  funds.  He  offers  it  to  W,  who  dis- 
trusts the  credit  of  both  A  and  B,  and  refuses  to  buy  it, 
unless  X  will  also  put  his  name  upon  it.  X,  therefore, 
in  order  to  give  the  note  credit,  signs  his  name  on  the 
back.  A  signs  after  him,  and  the  note  is  delivered 
over  to  W.  X's  indorsement  there  is  manifestly  irregu- 
lar. He  was  not  the  owner  of  the  note  at  the  time  he 
signed,  for, as  his  name  appears  before  that  of  the  payee, 
he  never  could  have  had  title  to  it.  He  is  what  is  known 
as  an  "anomalous"  indorser.  There  is  a  conflict  of 
authority  as  to  the  liability  of  such  indorsers.  In  Eng- 
land an  anomalous  indorser  of  a  bill  would  be  deemed 
to  be  in  the  position  of  the  drawer  of  a  new  bill  of 
exchange,  and  would  be  liable  accordingly.  The 
anomalous  indorser  of  a  note  would  not  be  liable  at  all. 
In  America  the  rule  varies  in  different  states.  In 
Massachusetts,  if  the  anomalous  indorser  signs  his  name 
at  the  time  the  note  is  made,  he  is  held  liable  as  a  joint 
maker.  If  he  does  not  sign  until  some  time  afterward, 
he  is  chargeable  as  a  guarantor  of  the  credit  of  the 
maker,  but  not  as  an  indorser.  In  some  of  the  other 
states  he  is  not  chargeable  at  all,  and  in  still  others  he 
is  held  to  the  responsibility  of  a  second  indorser. 


CHAPTER  V 

LIABILITY  OF  THE  MAKER  OF  A  NOTE 

1.  In  General.  —  The  maker  of  a  note  promises  uncon- 
ditionally to  pay  the  amount  of  its  face  to  the  payee,  or 
any  subsequent  holder,  at  the  date  when  the  instru- 
ment is  due,  or  at  any  time  thereafter.  His  liability 
is  absolute,  and  he  can  be  discharged  from  it  only  by 
payment,  or  by  the  lapse  of  the  statutory  period  of 
limitations,  or  by  bankruptcy.  This  promise  is  uncon- 
ditional so  far  as  the  maker  himself  is  concerned,  but 
he  is  not  compelled  to  pay,  as  a  general  rule,  until  the 
holder  of  the  note  presents  it  for  payment  and  surrenders 
it  to  him.  Inasmuch  as  the  note  is  negotiable,  if  the 
maker  should  pay  it  without  its  being  given  up  to  him, 
he  would  run  the  risk  of  being  compelled  to  pay  it  a 
second  time.  As  we  shall  see  later,  it  is  no  defence 
for  the  maker  of  a  note  to  allege  that  he  has  already 
paid  the  instrument,  if  payment  is  now  being  demanded 
by  a  bona  fide  purchaser  who  gave  value  for  it,  provided 
he  did  not  know  that  it  had  been  paid,  and  if  he  had 
purchased  it  before  maturity. 

A.  Owner  of  a  Lost  Instrument  may  Recover  in  Equity. 
—  It  often  happens  that  the  owner  of  a  bill  or  note 
seeks  to  recover  from  the  maker  or  acceptor  when  he 
does  not  have  it  in  his  possession,  by  reason  of  the  fact 
that  it  has  been  lost  or  destroyed.  Take  the  case 
where  the  holder  comes  into  court,  proves  that  he  was 

191 


192  NEGOTIABLE  CONTRACTS 

the  owner  of  a  note,  that  the  man  whom  he  is  suing 
was  the  maker,  proves  its  amount,  and  that  he  has  lost 
it,  and  asks  for  judgment.  If  he  were  permitted  to 
recover,  the  maker  might  be  compelled  to  pay  the  note 
a  second  time.  It  is  possible  that  the  bill  may  be  found 
by  some  third  party,  who  may  sell  it  to  some  one  else 
for  a  valuable  consideration,  and  in  that  case  the  pur- 
chaser could  recover  against  the  maker.  In  most  cases, 
however,  the  bill  either  has  been  destroyed  or  else  it 
has  been  lost  beyond  all  probability  of  its  ever  being 
found  again.  Under  such  circumstances,  it  seems 
unjust  not  to  permit  the  one  who  is  clearly  entitled 
to  the  money  to  recover.  At  the  same  time,  it  does 
not  seem  fair  to  subject  the  maker  to  the  risk  of  having 
to  pay  a  second  time.  In  order  to  reach  as  fair  a 
result  as  possible,  courts  of  equity,  in  some  states  courts 
of  law  also,  will  permit  the  owner  of  a  lost  instrument 
to  recover,  provided  he  has  proven  all  the  facts  which 
have  been  indicated,  and  gives  a  bond  by  which  he 
insures  the  maker  against  any  loss  on  account  of  having 
to  pay  the  note  or  bill  a  second  time.  Without 
giving  such  a  bond  of  indemnity,  however,  the  owner 
of  a  lost  instrument  is  never  permitted  to  recover. 

B.  Liability  of  Joint  Makers.  —  Thus  far  we  have 
spoken  only  of  the  liability  of  the  sole  maker  of  a 
note  or  acceptor  of  a  bill;  that  is,  of  the  cases  where 
one  party  only  has  signed  the  instrument.  But  sup- 
pose two  persons,  A  and  B,  sign  a  promissory  note, 
by  which  they  obligate  themselves  to  pay  C  a  sum 
of  money.  This  note  may  be  what  is  known  as  a 
"  joint "  note,  or  it  may  be  a  "  joint  and  several "  note, 
depending  upon  the  wording.  If  it  reads,  "  we  jointly 
promise  to  pay,"  or  "  we  jointly  and  severally  promise  to 


LIABILITY   OF  THE   MAKER   OF  A  NOTE  193 

pay,"  the  nature  of  the  liability  is  perfectly  clear.  If 
nothing  is  said  about  the  nature  of  it,  the  two  parties 
having  signed  the  instrument,  it  is  a  joint  note.  In 
some  states  statutes  have  been  passed,  providing  that 
all  notes  signed  by  two  parties  shall  be  deemed  to  be 
joint  and  several  notes,  even  though  they  may  be  ex- 
pressly declared  to  be  joint. 

The  distinction  between  the  two  involves  the  na- 
ture of  the  remedy.  If  the  note  be  joint  the  makers 
make  an  indivisible  promise  to  pay.  There  are 
several  promisors,  but  only  one  promise.  When  the 
holder  of  the  note  sues,  he  may  join  all  the  makers  as 
defendants  or  sue  one  only.  As  there  is  only  one 
promise  there  may  be  only  one  suit ;  consequently,  if 
he  sues  one,  and  subsequently  finds  him  to  be  insolvent 
and  therefore  gets  nothing,  he  cannot  sue  any  other  — 
his  right  of  action  is  gone.  But  if  the  note  be  joint 
and  several,  each  signer  has  made  a  separate  promise  to 
pay  the  full  amount,  as  well  as  a  common  promise  to 
pay  in  conjunction  with  his  fellows ;  therefore  the 
holder  of  the  instrument  may  sue  each  one  successively 
until  he  is  able  to  collect  the  full  amount. 


CHAPTER  VI 

LIABILITY  OF  THE  ACCEPTOR  OF  A  BILL  OF  EXCHANGE 

1.  In  General.  —  Until  he  accepts  the  bill  of  ex- 
change, the  drawee  is  under  no  liability.  The  bill  is 
an  order  to  him  to  pay  the  amount  to  the  payee,  but 
until  he  signifies  his  willingness  to  do  so,  he  is  not  a 
party  to  the  contract.  After  he  accepts,  however,  he 
is  under  an  absolute  responsibility  to  pay  the  amount 
of  the  face  of  the  bill  to  the  holder  at  maturity.  If  he 
fails  at  that  time  he  must  pay  thereafter,  with  interest. 
If  the  drawer  is  compelled  to  take  back  the  bill,  by 
reason  of  the  failure  of  the  acceptor  to  pay  it  at  matur- 
ity, the  latter  is  under  a  duty  to  pay  the  drawer  not 
only  the  amount  of  the  bill  with  interest,  but  also  any 
incidental  expenses  which  he  may  have  incurred  by 
reason  of  the  default  of  the  acceptor.  Sometimes  the 
drawee  accepts  conditionally  and  not  absolutely,  as 
where  one  accepted  "half  in  money  and  half  in  bills." 
In  such  a  case  he  is  responsible  only  according  to  the 
terms  of  the  acceptance. 

A.  Acceptor  for  "Honor."  —  The  drawee  is  the  only 
one  who  can  accept  a  bill  in  the  regular  way.  Some- 
times, however,  it  happens  that  the  bill  is  presented 
to  the  drawee  and  acceptance  is  refused.  The  bill  is 
then  "protested,"  i.e.,  formally  declared  to  be  dis- 
honored by  a  notary  public ;  and  the  next  step  of  the 

194 


LIABILITY  OF  ACCEPTOR  OF  BILL  OF  EXCHANGE      195 

holder  would  ordinarily  be  to  sue  the  drawer.  But 
if  X,  a  friend  of  the  drawer,  has  reason  to  believe 
that  the  drawee  will  ultimately  pay,  and  in  the  mean- 
time wishes  to  protect  the  drawer  from  suit,  he  may 
accept  the  bill  "supra  protest,"  for  the  honor  of  the 
drawer.  This  means  that  he  agrees  to  pay  the  bill 
ultimately;  if  it  is  again  presented  to  the  drawee  at 
maturity,  and  payment  is  again  refused,  it  is  again 
protested,  and  he  is  duly  notified  of  these  facts. 

As  we  shall  see,  when  we  discuss  the  secondary  liabil- 
ity of  the  parties  to  instruments  of  this  kind,  viz.,  draw- 
ers and  indorsers,  there  are  a  number  of  formalities  that 
must  be  complied  with  in  order  to  hold  them.  An 
ordinary  acceptor,  or  maker,  is  the  principal  debtor  and 
has  absolutely  bound  himself  to  pay;  consequently  the 
observance  of  these  formalities  is  not  so  essential. 
But  if  a  man  agrees  to  pay  only  in  case  some  one  else 
does  not,  he  stands  in  the  relation  of  a  surety,  and  can- 
not be  charged  unless  the  proper  formalities  of  pro- 
test and  notice  are  observed.  In  the  case  before  us,  X 
is  not  the  principal  debtor.  He  has  come  forward  to 
save  the  credit  of  the  drawer,  and  has  promised  to  pay 
if  the  drawee  a  second  time  refuses.  If  this  happens, 
the  holder  is  bound  to  have  the  bill  promptly  protested 
a  second  time,  and  to  give  due  notice  to  the  acceptor 
for  honor,  X.  If  he  fails  in  any  particular,  X  is  dis- 
charged from  liability. 


CHAPTER  VII 

LIABILITY  OF  DRAWER  AND  INDORSER 

1.  Drawer  and  Indorser  secondarily  Liable.  —  So  far,  we 
have  been  discussing  the  responsibility  of  the  parties 
who  are  primarily  liable  on  a  bill  of  exchange  or  promis- 
sory note.  When  we  say  a  man  is  primarily  liable, 
we  mean  that  he  is  the  principal  debtor  —  the  one  who 
is  bound  both  legally  and  morally  to  pay  the  amount 
owing.  When  we  say  a  man  is  secondarily  liable,  we 
mean  that  he  promises  to  pay,  in  case  some  one  else 
does  not.  The  drawer  of  a  bill  of  exchange,  and  the 
indorser  of  a  bill  or  note,  are  parties  who  are  second- 
arily liable.  The  responsibilities  of  the  drawer  of  a 
bill  and  the  indorser  of  either  a  bill  or  note  are  prac- 
tically identical,  and  we  may  discuss  them  at  the 
same  time.  It  may  be  understood,  when  we  use  only 
one  term  for  the  sake  of  illustration,  that  the  same 
principles  will  apply  to  the  other. 

2.  What  the  Drawer  and  Indorser  Promise  to  Do. — When 
the  drawer  of  a  bill  signs  his  name  to  the  instrument, 
he  promises  the  payee,  and  all  subsequent  holders  of 
the  bill,  that  the  acceptor  shall  pay  its  amount  at  matu- 
rity, and  agrees  that  in  case  the  acceptor  does  not  pay, 
he,  the  drawer,  will  do  so,  provided  certain  conditions, 
to  be  hereafter  discussed,  have  been  complied  with. 
Suppose  you  own  a  bill,  not  yet  due,  which  you  wish 
to  use  in  payment  of  a  debt  which  you  owe  to  A, 
and  you  therefore  indorse  the  bill  over  to  him.     You 

196 


LIABILITY  OF  DRAWER  AND   INDORSER  197 

have  not  only  transferred  the  ownership  to  him,  but 
you  have  also  agreed  that  he  shall  suffer  no  loss  by 
reason  of  the  default  of  the  acceptor  of  that  bill.  In 
other  words,  you  guarantee  that  the  bill  will  be  paid  at 
maturity,  with  the  understanding  that  if  it  is  not,  you 
will  make  good  whatever  loss  may  have  been  suffered 
by  any  subsequent  holder. 

In  the  same  way,  A  may  indorse  to  B,  and  B  to  C,  and 
C  to  D.  Each  indorser  promises  all  subsequent  indorsees 
that  they  shall  suffer  no  loss  by  reason  of  default  in  the 
payment  of  the  instrument  which  they  have  purchased. 
These  parties,  by  the  act  of  putting  their  names  on  the 
paper,  agree  that  they  will  fully  indemnify  the  holder 
and,  if  necessary,  pay  not  only  the  face  value  of  the  in- 
strument, but  also  any  expense  which  the  purchaser  may 
have  incurred  by  virtue  of  the  non-payment  of  the  bill  by 
the  acceptor.  It  should  be  mentioned,  in  this  connec- 
tion, that  the  holder  of  a  bill  or  note  may,  if  he  chooses, 
pass  the  title  to  it  without  subjecting  himself  to  any 
liability  at  all.  He  may  do  this  by  indorsing  "without 
recourse. "  That  is,  by  adding  these  two  words  after  his 
signature.     In  such  a  case  he  has  no  liability  at  all. 

3.  Conditions  upon  which  the  Drawer  and  Indorser  are 
Liable.  —  The  drawer  and  indorser  are  secondarily  and 
not  primarily  liable,  and  their  responsibility  depends 
upon  certain  conditions,  which  must  be  faithfully  per- 
formed by  the  holder.  In  the  first  place,  the  holder  of 
the  instrument  must  take  it  when  due  to  the  maker  or 
acceptor,  as  the  case  may  be,  and  formally  demand  pay- 
ment. This  is  what  is  known  as  "presentment."  In 
the  second  place,  it  is  necessary  for  the  holder  to  send 
a  prompt  notice  of  the  non-payment  of  the  bill  to  the 
drawers  or  indorsers  whom  he  intends  to  hold  responsi- 


198  NEGOTIABLE  CONTRACTS 

ble.    If  he  fails  to  give  notice  to  them,  they  are  entirely 
freed  from  liability. 

In  order  to  determine  what  is  a  prompt  notice,  the 
court  will  take  into  consideration  all  the  circumstances 
of  the  case.  If  the  parties  all  live  in  the  same  city,  and 
no  good  reason  is  shown  why  the  notice  should  not  be 
sent  at  once,  only  one  day  is  allowed  after  the  bill  or 
note  has  been  dishonored.  If  the  parties  neglect  to  send 
the  notice  on  time,  it  is  too  late  to  charge  the  drawer  or 
indorser. 

If  the  bill  of  exchange  is  a  foreign  bill,  that  is,  if  it  be 
one  drawn  upon  a  man  who  lives  in  another  country  or 
another  state,  it  must  also  be  "protested"  before  the 
drawer  or  indorser  can  be  held  responsible.  A  "  protest " 
is  a  formal  statement  which  must  be  made  by  a  notary 
public,  and  which  sets  forth  the  fact  that  the  bill 
therein  described  has  been  presented  for  payment,  and 
that  payment  has  been  refused,  concluding  with  a  formal 
protest,  as  it  is  called,  against  the  bill,  to  which  is 
affixed  the  signature  and  seal  of  the  notary.  It  is  not 
absolutely  necessary  for  domestic  bills  of  exchange  to 
be  protested,  but  the  usual  practice  is  that  all  bills  of 
exchange  and  promissory  notes  shall  be  protested  as  soon 
as  they  are  dishonored,  for  the  protest  is  the  best  evi- 
dence of  the  fact  of  dishonor.  If  all  these  conditions 
have  been  complied  with,  then  the  drawer  or  indorser 
may  be  held  responsible  for  the  payment  of  the  instru- 
ment, together  with  incidental  expenses  which  the 
holder  may  have  incurred  by  the  reason  of  its  non-pay- 
ment at  maturity. 

4.  Irregularity  in  the  Instrument  does  not  Excuse  the 
Drawer  or  Indorser.  —  Subject  to  the  performance  of  the 
foregoing  conditions,  the  promise  of  the  drawer  or  in- 


LIABILITY  OF  DRAWER  AND  INDORSER  199 

dorser  is  unconditional.  It  is  an  absolute  promise 
made  to  subsequent  holders  of  that  particular  instru- 
ment, that  they  shall  suffer  no  loss  by  reason  of  pur- 
chasing the  paper  on  which  the  drawer  or  indorser  has 
placed  his  signature.  Suppose  I  have  in  my  possession 
a  forged  bill  of  exchange,  which  has  been  indorsed  to 
me  by  some  one  else.  Of  course  that  instrument  is  of 
no  value  whatever,  —  it  has  no  legal  existence  because 
it  was  never  signed  by  the  person  whose  name  appears 
upon  it.  If  I  sell  that  instrument  to  you,  placing  my 
name  upon  the  back  as  indorser,  and  you,  after  pre- 
senting it  for  payment  (payment  of  course  having  been 
refused),  seek  to  charge  me  for  your  loss,  I  will  have  to 
pay.  Remembering  that  my  promise  to  you  is  uncon- 
ditional, it  is  clear  enough  that  I  will  be  compelled  to 
reimburse  you  for  whatever  you  have  paid  for  the  bill, 
and  any  expense  which  you  may  have  suffered.  No 
irregularity  in  the  written  instrument  which  has  oc- 
curred prior  to  the  indorsement  of  the  bill,  will  excuse 
the  indorser  from  his  promise  to  subsequent  holders. 

5.  Remedy  of  One  Indorser  against  a  Prior  Indorser.  — 
You  will  remember  that  each  indorser  promises  all 
subsequent  holders  of  the  instrument  that  they  shall 
suffer  no  loss  by  reason  of  the  default  of  the  princi- 
pal debtor.  Each  indorser,  therefore  (except  the  first 
one),  while  he  is  responsible  to  subsequent  indorsees, 
has  a  remedy  against  any  prior  indorser.  Suppose  A 
is  the  maker  of  a  note.  B  is  the  payee.  B  indorses 
to  C.  B  then  becomes  the  first  indorser.  C  indorses 
to  D.  C  is  the  second  indorser.  D  indorses  to  E,  and 
E  to  F.  If  F  presents  the  note  to  the  maker,  A,  on 
the  proper  day,  and  payment  is  refused,  he  may,  by 
sending  notice  to  E,  hold  him  responsible  for  his  in- 


200  NEGOTIABLE  CONTRACTS 

demnification.  If  F  thinks  either  D  or  C  or  B  a  more 
reliable  person  than  E,  he  may  charge  either  one  of  them 
by  sending  the  proper  notice;  for  each  indorser  has 
promised  to  indemnify  not  only  his  immediate  indor- 
see, but  any  of  the  subsequent  holders  who  may  suffer 
a  loss.  If  F  recovers  against  B,  then  C,  D,  and  E  are 
discharged  from  all  responsibility. 

Now  suppose  F  charges  E,  sues  him,  and  recovers.  If 
E  has  promptly  communicated  the  notice  to  D  he  has 
a  "remedy  over,"  as  it  is  called,  against  D.  D  then 
may  indemnify  himself  by  charging  C,  C  by  charging  B, 
and  B  may  recover  the  full  amount  from  A,  the  orig- 
inal maker,  provided,  which  is  not  likely,  the  latter  is 
solvent.  The  maker's  responsibility  to  B  does  not,  of 
course,  depend  upon  any  conditions,  and  it  terminates 
only  with  the  statutory  period  of  limitations.  From 
this  you  can  see  the  theory  of  indorsement  of  negoti- 
able paper.  We  have  a  sort  of  endless  chain  of  liability. 
All  except  the  maker  of  a  note,  or  the  acceptor  of  a  bill, 
are  only  secondarily  liable.  Their  responsibility  de- 
pends upon  the  performance  of  the  conditions  to  which 
we  have  referred. 

A.  Presentment —  We  will  now  take  up  more  in 
detail  the  fulfillment  of  the  various  conditions  which 
are  necessary  before  the  drawer  or  the  indorser  may  be 
charged.  We  have  already  explained  that  presentment 
means  taking  the  bill  or  note  to  the  maker  or  acceptor, 
and  formally  demanding  payment.  It  is  also  customary 
to  present  a  bill  of  exchange  to  the  drawee  for  acceptance. 
This  step  is  not,  however,  absolutely  necessary  in  order 
to  charge  the  drawer  or  indorser  unless  the  bill  is  one 
payable-at  or  after  sight.  In  such  a  case,  —  and,  indeed, 
most  bills  are  so  drawn,  —  presentment  for  acceptance 


LIABILITY  OF  DRAWER  AND  INDORSER  201 

is  a  necessity.  If  a  bill  directed  to  A  and  signed  "C," 
reads,  "  Pay  B  sixty  days  after  sight  one  hundred  dol- 
lars," that  means  that  C,  the  drawer,  does  not  order  A 
to  pay  till  sixty  days  after  the  bill  is  presented  to  him 
for  acceptance,  or  sixty  days  after  he  has  had  "sight," 
i.e.,  has  seen  the  bill.  There  is  no  liability  in  such  a 
case  until  the  bill  is  presented,  —  not  even  on  the  part 
of  the  drawer.  Presentment  for  payment  at  the  proper 
time  and  place  is,  however,  in  all  cases  absolutely  nec- 
essary in  order  that  the  holder  may  preserve  his  remedy 
against  the  drawer  and  indorsers. 

B.  To  whom  Presentment  for  Payment  should  be  Made. 
—  It  is  not  necessary  that  the  holder  present  the  instru- 
ment and  demand  payment  of  the  acceptor  or  maker 
personally.  It  is  sufficient  if  it  is  presented  at  his 
place  of  business,  to  a  clerk  or  other  agent,  or  at  his 
house,  to  his  wife,  or  whoever  may  be  found  there. 
This  is  deemed  a  sufficient  presentment,  because  if  the 
acceptor  or  maker  could  not  be  there  himself,  he  should 
have  left  funds  with  an  agent  to  discharge  the  obliga- 
tion. If  there  are  several  joint  acceptors  or  makers, 
who  are  not  partners,  presentment  must  be  made  to 
each  one  separately.  If  they  are  partners,  presentment 
to  one  only  is  sufficient,  for  each  partner  is  the  agent  of 
all  the  others.  If  the  maker  or  acceptor  has  died  prior  to 
the  date  of  the  maturity  of  the  instrument,  present- 
ment for  payment  should  be  made  to  his  executors  or 
administrators.  If  none  have  been  appointed,  it  may 
be  made  at  his  late  residence  or  place  of  business.  In 
any  of  these  cases,  if  no  one  to  make  payment  is  found 
at  the  proper  place,  this  is  a  sufficient  dishonor  of  the 
instrument,  as  it  is  the  duty  of  the  acceptor  or  maker, 
or  his  representatives,  to  have  some  one  there  to  pay. 


202  NEGOTIABLE   CONTRACTS 

C.  Place  of  Presentment.  —  If  it  is  stated  in  the  bill 
or  note  that  it  is  payable  at  a  particular  place,  pre- 
sentment must  be  made  at  that  place.  If  you  are  the 
holder  of  a  promissory  note  which  reads,  "  I  promise  to 
pay  one  hundred  dollars  at  the  Merchants'  Bank  of 
Philadelphia,"  you  would  have  to  present  that  note  at 
the  Merchants'  Bank.  If  you  did  not,  you  could  not 
charge  the  indorser.  If,  as  is  generally  the  case,  no  place 
is  mentioned  in  the  bill  or  note,  it  should  be  presented  at 
the  place  of  business  or  at  the  residence  of  the  principal 
debtor,  i.e.,  the  acceptor  of  the  bill  or  the  maker  of  the 
note.  This  is  imperative — the  presentment  must  be  at 
the  place  of  business  or  the  residence ;  even  if  made  per- 
sonally at  some  other  place,  it  is  not  a  good  presentment. 

A,  who  was  the  holder  of  a  promissory  note,  started 
to  go  to  the  office  of  B,  the  maker,  to  present  it  for  pay- 
ment. While  he  was  on  his  way  there,  he  met  B  on 
the  street  and  asked  him  if  he  intended  to  pay  the 
note;  B  replied  that  he  could  not.  A  then  did  not 
take  the  trouble  to  go  to  B's  office,  but  immediately 
sent  notice  of  the  dishonor  of  the  instrument  to  the 
indorsers.  When  he  attempted  to  hold  them  responsi- 
ble for  the  payment  of  the  note,  they  defended  on  the 
ground  that  there  had  not  been  a  proper  presentment 
to  the  maker,  and  the  court  sustained  them  in  their 
contention.  A  should  have  gone  on  to  the  business 
place  of  B,  and  there  made  a  formal  presentment,  even 
though  he  knew  B  was  not  going  to  pay.  This  may 
seem  to  be  carrying  a  technicality  too  far,  but  you  must 
remember  that  drawers  and  indorsers  are  only  sureties 
and  not  the  principal  debtors ;  the  law  therefore  will 
excuse  them  whenever  it  can  find  a  reasonable  oppor- 
tunity for  doing  so. 


LIABILITY  OF  DRAWER  AND  INDORSER  203 

D.  Time  of  Presentment.  —  In  order  to  subject  the 
drawer  and  indorsers  to  liability,  the  paper  must  be  pre- 
sented on  the  day  it  falls  due.  If  the  presentment  be 
made  either  before  or  after,  and  not  on  that  day,  they  are 
discharged  from  all  liability.  In  countries  where  days  of 
grace  are  allowed,  the  presentment  should  be  on  the  last 
day  of  grace.  The  number  of  days  of  grace  allowed  varies 
in  different  countries  —  from  three  days  usually  allowed 
in  the  United  States  and  in  England,  to  thirty  days 
allowed  in  some  parts  of  Italy.  In  some  states  in  this 
country  days  of  grace  have  been  abolished  by  statute. 
If  such  is  the  case,  the  presentment  of  course  should 
be  made  upon  the  day  of  maturity. 

If  the  day  of  maturity,  where  there  are  no  days  of 
grace,  or  the  last  day  of  grace,  where  days  of  grace  are 
allowed,  falls  on  Sunday  or  any  other  legal  holiday, 
presentment,  according  to  the  common  law  rule,  must 
be  made  on  the  day  before.  In  a  number  of  states  stat- 
utes provide  that  in  such  cases  presentment  may  be  on 
the  day  after.  If  the  note  be  one  payable  on  demand, 
it  is  not  expected  that  it  will  be  presented  for  payment 
at  once,  else  there  would  be  no  object  in  giving  it;  but 
it  should  be  presented  within  a  reasonable  time.  What 
is  a  reasonable  time  is  determined  by  the  court  upon 
the  circumstances  of  each  case  as  it  arises.  Any  time 
longer  than  the  statutory  period  is  always  held  to  be 
an  unreasonable  time.  If  the  statute  of  limitations 
provides  that  the  right  of  action  arising  out  of  a  simple 
contract  shall  be  barred  after  six  years,  the  presentment 
of  a  demand  note  six  years  after  its  date  would  cer- 
tainly be  too  late  to  charge  the  indorser. 

If  there  be  some  valid  reason  for  delay  in  present- 
ment,  whether    the    instrument    be    one    payable    on 


204  NEGOTIABLE   CONTRACTS 

demand  or  not,  it  may  be  excused.  If  a  state  of  war  or 
a  severe  storm  delays  the  mails,  or  if  the  note  is  lost, 
or  the  holder  is  too  ill  to  attend  to  the  matter,  the  pre- 
sentment may  be  good,  even  though  it  be  made  after 
the  proper  day.  With  respect  to  the  hour  in  which 
the  presentment  must  be  made,  it  is  well  settled  that 
it  must  take  place  during  reasonable  hours  of  business. 
If  at  a  bank,  during  banking  hours ;  if  at  the  maker's 
place  of  business,  during  business  hours ;  if  at  his  resi- 
dence, at  a  reasonable  time  —  certainly  between  sunrise 
and  sunset. 

E.  Notice  of  Dishonor. — If  a  bill  is  presented  for 
payment,  and  payment  is  refused,  it  is  absolutely  nec- 
essary that  prompt  notice  of  the  dishonor  be  sent  to 
the  drawer,  and  to  all  the  indorsers  whom  the  holder 
expects  to  hold  responsible.  A  failure  to  send  due 
notice  will  discharge  them  from  all  liability.  The 
notice  of  dishonor  consists  of  a  sufficiently  accurate 
description  of  the  bill  or  note  to  identify  it,  a  state- 
ment that  it  has  been  dishonored  or  unpaid,  and  the 
name  of  the  sender.  The  notice  is,  of  course,  sent 
for  the  purpose  of  letting  the  indorser  know  that 
he  is  to  be  held  responsible.  It  need  not,*  how- 
ever, expressly  notify  him  of  that  fact.  The  bare 
notice  of  dishonor  is  an  intimation  that  he  will  be  so 
held. 

F.  Time  of  Notice.  —  If  you  have  presented  a  bill  or 
note  for  payment  and  it  has  been  refused,  you  should 
immediately  send  notice  of  its  dishonor  to  all  the  in- 
dorsers. This  will  permit  you  to  charge  which  of  them 
you  choose  at  a  later  date.  If  you  fail  to  notify  them, 
you  have  lost  that  right.  It  is  not  absolutely  neces- 
sary, however,  to  send  notice  at  once.     The  rule  is,  if 


LIABILITY  OF  DRAWER  AND  INDORSER  205 

all  the  parties  live  in  the  same  town,  and  the  notice  is 
delivered  by  hand,  it  should  be  sent  on  the  next  day. 
A  failure  to  send  it  on  the  day  following  the  day  in 
which  the  party  sending  it  is  in  a  position  to  do  so, 
will  be  negligence,  and  will  discharge  all  the  in- 
dorsers.  When  we  say  the  day  following  the  day  in 
which  the  sender  is  in  a  position  to  forward  the  noti- 
fication, we  mean  that  the  holder  of  the  note  has  one 
day  following  dishonor,  the  indorser  whom  he  notifies 
has  one  day  following  the  one  upon  which  he  receives 
notification,  etc.  If  the  notification  is  sent  by  mail  to 
one  in  the  same  town,  it  should  be  sent  so  as  to  reach 
its  destination  on  the  next  day.  If  the  parties  do  not 
live  in  the  same  town,  it  is  sufficient  if  the  notice  of 
dishonor  be  sent  by  the  post  departing  on  the  day  fol- 
lowing. If  it  be  a  holiday,  it  is  not  counted,  the  day 
after  the  holiday  taking  its  place. 

The  whole  theory  underlying  the  doctrine  of  notice 
is  diligence.  The  party  seeking  to  charge  the  in- 
dorsers  must  not  fail  in  any  particular  to  send  the 
notification  promptly.  If  circumstances  intervene 
which  excuse  the  delay  and  remove  the  imputation 
of  carelessness,  then  the  failure  to  send  prompt  notice 
may  be  excused.  If  the  holder  does  not  know  the  place 
of  residence  of  the  indorser,  but  uses  due  diligence  and 
yet  fails  to  find  it  on  time,  he  is  excused  for  the 
delay  and  can  charge  the  indorser  nevertheless.  Mere 
inconvenience,  however,  will  not  be  a  sufficient  excuse. 
It  has  been  decided  that  the  illness  of  the  wife  of  the 
one  whose  duty  it  was  to  send  a  notification  would  not 
excuse.  As  to  the  hour  when  the  notice  should  be 
given,  very  much  the  same  observations  may  be  made 
as  those  which  were  made  about  the  hour  of  present- 


206  NEGOTIABLE  CONTRACTS 

ment.  It  should  be  at  a  reasonable  hour  —  if  at  a 
business  house,  during  business  hours,  etc. 

G.  Place  to  which  Notice  should  be  Sent.  —  Just  as  in 
the  case  of  presentment,  the  notice  must  be  sent  to  the 
residence  or  place  of  business  of  the  one  notified.  If 
it  is  sent  by  mail,  the  sender  must  properly  address  it. 
If  it  be  sent  to  a  large  city,  the  street  and  number  must 
be  ascertained  and  added  to  the  address.  One  excep- 
tion to  this  seems  to  be  made  in  a  case  where  a  man  has, 
in  putting  his  name  on  a  bill,  appended  the  name  of 
the  city  where  he  lives.  There  the  indorser  is  thought 
to  be  justified  in  sending  the  letter  to  the  exact  address 
as  indicated  on  the  bill.  If  a  man  receives  his  mail  at 
several  different  places,  a  notice  sent  to  one  will  be 
sufficient.  The  whole  theory  is  that  one  must  be  dili- 
gent. If  he  has  done  all  that  an  ordinarily  careful  man 
would  do  under  the  circumstances,  he  is  protected. 

H.  By  whom  Notice  should  be  Given.  —  The  notice  may 
be  sent  by  any  one  who  is  or  may  be  liable  to  pay  the 
bill  or  note.  Suppose  A  and  B  are  respective  indorsers 
of  a  promissory  note.  C  is  the  holder,  and,  in  case  the 
note  is  unpaid,  may  charge  B.  As  B  can  hold  A  if  he 
has  to  pay  the  note,  he  is  a  proper  party  to  send  him 
the  notification  of  the  dishonor.  If  he  does  so,  C  may 
take  advantage  of  that  fact  and  sue  A  directly  if  he 
chooses.  The  only  necessary  incident  is  that  A  must 
have  been  actually  informed  of  the  dishonor  by  a  proper 
person.  If  notice  is  sent  by  an  outsider,  or  by  a  party 
to  the  bill  who  is  not  responsible,  it  is  a  nullity.  If  a 
drawer  or  maker  sends  the  notice,  it  will  not  be  good, 
because  those  parties  are  not  holders  of  the  instrument, 
and  are  in  no  way  concerned  with  the  liability  of  the 
indorsers.     It  is   not  necessary  that  the   one  who  is 


LIABILITY  OP  DRAWER  AND  INDORSER  207 

sending  the  notice  of  dishonor  should  send  it  person- 
ally. He  may  do  it  through  an  agent.  It  is  very 
common  to  deposit  promissory  notes  with  banks  for  col- 
lection. The  bank  is  the  agent  of  the  holder,  not  only 
for  the  purpose  of  collecting  the  note,  but  also  for  the 
purpose  of  notifying  the  drawers  and  indorsers.  Such 
a  notice  is  perfectly  good. 

I.  To  whom  Notice  should  be  Given.  —  Notice  may  be 
sent  to  the  person  to  be  charged,  or  to  his  agent.  If 
there  be  joint  indorsers,  all  should  be  notified.  If  the 
indorsers  form  a  partnership,  notice  to  one  is  sufficient. 
If  the  party  sought  to  be  charged  is  dead,  notice  should 
be  sent  to  his  executors  or  administrators  (notice  to  one 
is  sufficient);  if  there  are  none  appointed,  the  notice 
may  be  directed  to  the  deceased  at  his  late  residence  or 
place  of  business.  If  the  one  to  be  notified  is  a  bank- 
rupt, the  notice  may  be  sent  to  him,  or  his  assignee,  at 
the  option  of  the  sender. 

J.  Manner  of  serving  Notice.  —  "With  regard  to  the  man- 
ner in  which  notice  must  be  sent,  there  are  a  few  gen- 
eral rules.  If  the  parties  live  or  do  business  in  the 
same  town,  the  notice  should  be  actually  delivered  by 
messenger,  though  this  is  not  imperative.  It  may  be 
sent  by  mail,  but  it  should  be  mailed  in  time  actually  to 
reach  the  one  to  whom  it  is  sent  on  the  next  day.  If, 
however,  the  parties  live  at  a  distance  from  each  other, 
and  there  is  a  mail  service  between  their  respective 
places  of  residence,  the  mail  alone  is  ordinarily  used. 
Service  by  delivery  is  always  permissible,  and  is 
preferable  if  it  can  conveniently  be  made. 

6.  When  the  Drawer  or  Indorser  is  Liable  without  the  Per- 
formance of  the  Usual  Conditions.  —  We  have  now  briefly 
discussed  the  various  conditions  that  must  ordinarily  be 


208  NEGOTIABLE  CONTRACTS 

performed,  before  a  drawer  or  indorser  can  be  held 
responsible  to  perform  his  obligations.  There  are 
some  cases,  however,  where  the  circumstances  are 
such  that  this  performance  of  conditions  is  unneces- 
sary. It  sometimes  happens  that  there  is  a  special 
agreement  entered  into  between  the  drawer  and  the 
acceptor  of  a  bill  of  exchange,  by  which  it  is  pro- 
vided that  the  drawer  shall  be  the  principal  debtor. 
Sometimes,  also,  it  happens  that  the  drawer  has  failed 
to  deposit  funds  with  the  drawee,  and  consequently  the 
latter  refuses  to  accept  the  bill.  In  such  cases  it  is  not 
the  drawee,  but  the  drawer,  who  is  really  primarily 
liable.  You  will  remember  that  the  law  requires  a 
strict  performance  of  the  conditions  mentioned  before 
the  drawer  or  indorser  can  ordinarily  be  held  respon- 
sible, for  the  reason  that  those  parties  are  usually  only 
sureties  for  the  performance  of  the  obligation  of  the 
principal  debtors.  But  if  the  drawer  or  indorser  is 
himself  the  principal  debtor,  there  is  no  reason  for 
the  performance  of  these  conditions,  hence  they  are 
unnecessary.  In  the  situation  we  have  mentioned,  the 
drawer  or  indorser  can  be  charged  without  presentment 
and  without  notice. 

The  same  rule  holds  if  the  drawer  or  indorser  has 
waived  the  performance  of  the  conditions.  If,  for  in- 
stance, he  has  voluntarily  agreed  that  he  need  not  be 
notified  of  the  dishonor  of  the  bill  or  note,  then  the 
performance  of  this  condition  is  unnecessary.  In  the 
same  way,  if  a  man  indorses  a  bill  which  is  a  forgery, 
he  is  not  only  responsible  to  subsequent  holders,  but 
he  is  responsible  to  them  without  the  performance  of 
any  of  these  formalities.  Inasmuch  as  he  has  put  his 
name  upon  a  piece  of  paper  which  otherwise  would  be 


LIABILITY  OF  DRAWER  AND  INDORSER  209 

void,  he  is  really  the  only  debtor  and,  being  primarily 
liable,  is  not  entitled  to  notice. 

K.  Accommodation  Paper.  —  One  of  the  most  common 
instances  of  a  case  where  the  drawer  of  a  bill  or  the 
indorser  of  a  note  is  primarily  liable,  is  in  the  case  of 
accommodation  paper.  Suppose  you  are  desirous  of 
raising  one  thousand  dollars,  but  your  credit  is  not 
good.  You  go  to  X,  who  is  a  well-known  business 
man  and  a  friend  of  yours  who  has  confidence  in  you, 
and  ask  him  to  make  a  note  for  your  accommodation. 
He,  if  he  is  thus  willing  to  favor  you,  makes  out  a 
promissory  note  payable  to  your  order,  and  signs  it  as 
maker.  You  then  indorse  the  note  over  to  some  bank 
and  receive  the  cash.  This  is  practically  a  loan  of 
money  by  X  to  you,  only  instead  of  lending  you  the 
money  directly,  he  lends  you  his  credit.  Here,  as 
between  you  and  X,  you  owe  the  money.  While  the 
holder  of  the  note  could  sue  X  and  recover,  because 
his  name  is  on  the  paper  as  maker,  yet  you  are  the  real 
debtor.  If  the  note  is  presented  to  X  at  maturity  and 
he  refuses  to  pay,  as  he  naturally  would,  the  under- 
standing being  that  you  would  pay,  the  note  is,  of 
course,  technically  dishonored.  The  question  is,  Must 
the  holder  present  the  note  and  give  notice  of  the  dis- 
honor to  you,  or  may  he  sue  you  without  these  for- 
malities? The  latter  is  the  rule.  You  are  the  real 
debtor,  you  are  primarily  liable,  therefore  you  are  not 
entitled  to  notice,  and  presentment  and  protest  are 
unnecessary.  The  same  thing  would  be  true  in  a  case 
where  a  man  has  accepted  a  bill  for  the  accommodation 
of  the  drawer.    The  latter  is  chargeable  without  notice. 

L.  Why  Notice  is  Unnecessary  when  the  Drawer  or 
Indorser   is   primarily   Liable.  —  The   reason   notice   is 


210  NEGOTIABLE  CONTRACTS 

required  in  all  the  cases  above  mentioned,  is  that 
the  drawer  or  indorser  sought  to  be  charged  has  a 
remedy  against  his  principal.  If  the  drawer  must  pay 
the  bill,  he  may  in  turn  sue  the  acceptor.  In  the 
same  way,  an  indorser  may  sue  a  prior  indorser  or 
the  maker.  The  object  of  the  notice  is  to  enable  him 
to  take  prompt  measures  to  secure  himself.  The  maker 
may  be  about  to  abscond.  If  the  indorser  is  promptly 
informed  of  the  fact  of  dishonor,  he  may  take  measures 
to  prevent  him  from  doing  so.  But  where  the  drawer 
or  indorser  is  himself  the  principal  debtor,  he  has  no 
remedy  against  anybody  else.  Consequently,  there  is 
no  object  in  sending  notice.  That  is  the  reason  it  is 
not  required  when  the  drawer  or  indorser  is  primarily 
liable. 

M.  When  the  Drawer  fails  to  Put  the  Drawee  in  Funds. 
—  If  a  man  draws  a  bill  upon  a  drawee  with  whom 
he  has  made  no  arrangements  for  its  acceptance, 
and  in  whose  hands  he  has  placed  no  funds,  he  is, 
in  one  sense,  guilty  of  a  fraud  upon  the  payee;  for 
even  if  he  drew  the  bill  with  the  best  intentions,  he 
has  certainly  been  guilty  of  gross  carelessness  in  fail- 
ing to  make  the  proper  arrangements  with  the  drawee. 

Suppose  you  draw  a  bill  on  the  X  bank  in  London ; 
you  have  had  no  dealings  with  the  X  bank  and  have 
no  funds  there;  the  bill  is  drawn  in  favor  of  A,  to 
whom  you  send  it  by  mail.  A  presents  the  bill  at 
the  X  bank  and  acceptance  is,  of  course,  refused.  In 
such  a  case  you  are  deemed  to  be  the  principal  debtor, 
and  may  be  charged  without  notice  of  dishonor.  One 
exception  may  be  made  in  a  case  where  it  appears,  from 
all  the  circumstances,  that  the  drawer  might  reasonably 
expect  the  drawee  to  meet  the  bill,  as  where  the  parties 


LIABILITY  OF  DRAWER  AND  INDORSE R  211 

have  had  a  long  series  of  dealings  with  each  other,  and 
the  drawee  has  been  accustomed  to  honor  bills  drawn 
on  him  by  the  drawer,  even  if  the  latter's  funds  were 
temporarily  low. 

N.  Where  a  Special  Contract  has  been  Made.  —  Some- 
times a  special  arrangement  is  made  between  the 
indorser  and  the  acceptor  or  maker,  by  which  it  is 
arranged  that  the  former  shall  meet  the  bill  or  note 
when  due.  Suppose  you  are  the  maker  of  a  note,  and 
being  about  to  go  abroad  for  a  protracted  stay,  leave 
funds  in  the  hands  of  an  indorser  to  pay  it  when  due. 
He  fails  to  notify  the  holder,  the  note  is  presented 
at  your  place  of  business  at  maturity,  is  protested  for 
non-payment,  and  the  indorser  is  sued  without  notice 
of  the  dishonor  of  the  instrument.  There,  again,  you 
see  the  indorser  is  the  principal  debtor.  He  became 
so  when  you  put  funds  in  his  hands  to  meet  the  bill ; 
he  is  therefore  not  entitled  to  notice  and  may  be  sued 
without  it. 

0.  When  Notice  has  been  Waived.  —  If  the  drawer  or 
indorser  excuses  the  holder  from  the  duty  of  pre- 
sentment and  notice,  he  may  be  charged  without  the 
performance  of  these  conditions.  This  waiver  may  be 
either  by  word  of  mouth  or  in  writing,  if  made  after 
the  instrument  was  executed  and  before  it  had  become 
due.  But  if  the  drawer,  when  he  draws  the  bill,  or 
the  indorser,  when  he  indorses  the  instrument,  agrees 
to  be  liable  without  notice,  he  is  making  a  contract 
different  from  the  usual  one  implied  by  these  acts. 
As  his  contract  is  in  writing,  he  must  put  his  qualifi- 
cation in  writing,  or  it  will  not  bind  him.  This  is 
true  by  virtue  of  the  rule  that  you  cannot  vary  a 
written  contract  by  oral  evidence.     If  the  note  falls 


212  NEGOTIABLE  CONTRACTS 

due,  and  a  reasonable  time  for  giving  notice  has 
elapsed,  and  yet  the  indorser  promises  to  pay  in 
spite  of  the  fact,  he  may  be  held  responsible.  This 
promise  seems*  to  be  based  on  no  consideration  and 
therefore  void;  nevertheless,  the  courts  are  uniform  in 
deciding  that,  under  such  circumstances,  it  is  binding. 


CHAPTER  VIII 

NEGOTIATIONS  OF  BILLS  AND  NOTES 

1.  Manner  of  Negotiation.  — "When  we  speak  of  nego- 
tiable paper,  we  mean  paper  that  circulates  with  com- 
parative freedom  from  hand  to  hand,  not  necessarily  as 
freely  as  money  circulates,  but,  nevertheless,  paper  which 
gathers  credit  as  it  goes,  instead  of  losing  it,  as  would 
be  the  case  with  an  ordinary  contract.  It  is  this 
quality  that  distinguishes  bills  and  notes  from  other 
contracts.  This  chapter  will  be  devoted  to  a  dis- 
cussion of  the  manner  and  effect  of  their  negotiation 
or  passage  from  hand  to  hand.  The  manner  of  negotia- 
tion we  have  already  discussed.  You  will  remember 
that  in  a  former  chapter  we  saw  that  this  paper  is 
transferred  by  means  of  indorsement.  This  is  the 
most  common  method.  Some  paper  can  be  sold  in  no 
other  way.  Some,  however,  is  so  drawn  that  it  may 
be  transferred  by  delivery  alone.  This  would  be  the 
case  if  a  note  or  bill  were  made  payable  to  the  bearer. 

2.  Negotiation  Prior  to  Maturity.  —  From  the  stand- 
point of  the  parties,  it  is  very  important  whether  this 
negotiation  takes  place  before  or  after  the  note  or  bill 
falls  due.  As  we  shall  see  later,  the  man  who  purchases 
a  bill  which  should  already  have  been  paid,  does  so  at 
his  own  peril,  for  he  takes  it  with  the  knowledge  that 
there  is  something  wrong  about  it,  otherwise  it  would 

213 


214  NEGOTIABLE  CONTRACTS 

have  been  paid  at  maturity.  Such  paper  is  called 
"overdue  paper."  We  shall  first  discuss  the  effect  of 
negotiation  prior  to  maturity. 

The  great  principle  underlying  the  whole  theory 
of  the  negotiability  of  bills  and  notes,  is  the  princi- 
ple that  whoever  in  good  faith  pays  value  for  such 
an  instrument  takes  it  free  from  all  personal  defences. 
Suppose  you  buy  a  horse,  fraudulently  warranted  to 
be  sound,  and  give  in  payment  your  promissory  note. 
You  discover  the  horse  to  be  unsound,  return  him  to 
the  seller,  and  repudiate  your  bargain.  If  the  man 
who  sold  you  the  horse  sues  you  on  your  note,  you 
have  a  good  defence,  viz.,  that  the  horse  was  not  sound, 
hence  you  have  not  received  value  for  the  instrument. 
But  suppose,  instead  of  suing  you,  he  sells  your  note  to 
A,  who  is  ignorant  of  the  fraudulent  warranty,  and 
who  gives  a  good  price  for  the  instrument.  The  fact 
that  you  had  received  no  consideration,  or  that  you  had 
been  cheated,  would  not  avail  you  as  against  A.  You 
would  have  to  pay.  A,  being  what  is  called  an  "inno- 
cent purchaser  for  value,"  takes  the  paper  free  from  all 
defences  of  that  nature. 

As  we  have  intimated,  there  are  some  defences  that 
would  be  good  even  as  against  an  innocent  purchaser 
for  value  —  good  against  anybody.  We  will  first  dis- 
cuss this  class,  and  then  we  will  take  up  the  question 
as  to  who  is  an  innocent  purchaser  for  value,  in  order 
that  we  may  see  against  whom  the  personal  defences 
are  available.  The  fact  that  the  purchaser  has  not  paid 
the  face  value  of  the  instrument  will  be  no  defence 
whatever  when  he  is  suing  the  maker.  You  may  have 
paid  only  five  hundred  dollars  for  a  promissory  note  of 
one  thousand  dollars,  but  you  are  entitled  to  recover  the 


NEGOTIATIONS  OF  BILLS  AND  NOTES  215 

full  one  thousand  dollars.  Such  a  possible  contention 
must  be  distinguished  from  the  defences  which  may  be 
successfully  urged. 

3.  Absolute  Defences.  —  All  possible  defences  which 
may  be  set  up  to  defeat  recovery  on  a  bill  or  note  are 
divided  into  two  classes,  viz.,  "absolute"  defences, 
which  are  good  against  all  the  world,  and  "personal" 
defences,  which  are  good  only  against  those  who  have 
actual  or  constructive  notice  of  their  existence.  This 
means  generally  that  they  are  good  against  only  the  im- 
mediate parties  to  the  instrument.  "  Absolute  "  defences 
are  so  called  because  they  attach  to  the  thing  itself  and 
travel  with  it,  no  matter  into  whose  hand  it  may  come. 
They  are  of  three  kinds,  based  upon  the  incapacity  of 
the  parties  to  execute  a  contract,  or  upon  the  circum- 
stance that  the  contract  is  illegal  and  void,  or  upon  the 
fact  that  the  instrument  sued  upon  has  been  extin- 
guished in  law,  and  is  therefore  a  nullity.  If  the  de- 
fence set  up  is  based  upon  any  one  of  these  three  grounds, 
there  can  be  no  recovery,  no  matter  who  is  suing  upon 
the  bill  or  note,  for  in  each  of  these  three  classes  of 
cases  the  instrument  is  as  so  much  waste  paper,  —  it 
has  no  legal  existence.  Such  a  defence  does  not, 
however,  free  the  indorsers  from  their  liability  to 
indemnify  the  successive  holders,  as  we  have  already 
learned. 

A.  When  the  Maker  or  Acceptor  is  Incapable  of  executing 
a  Contract.  —  If  the  maker  of  a  note,  or  the  drawer  or 
acceptor  of  a  bill,  is  incapable  of  executing  a  con- 
tract, then,  obviously,  the  paper  is  of  no  validity,  no 
matter  into  whose  hands  it  may  happen  to  come.  Such 
incapacity  may  exist  by  reason  of  the  fact  that  the 
maker  of  the  instrument  is  an  infant,  a  lunatic,  or 


216  NEGOTIABLE   CONTRACTS 

extremely  intoxicated.  The  circumstance  that  the 
maker  was  a  married  woman  constituted  a  disability  at 
common  law ;  but  in  England,  and  nearly  all  the  states 
in  this  country,  this  disability  has  been  removed  by  stat- 
ute. We  have  already  seen  in  our  discussion  of  con- 
tracts that  if  a  man  is  incapable  of  making  a  contract, 
his  attempt  to  do  so  results  in  nothing  at  all,  and  the 
same  principle  naturally  holds  good  for  negotiable  con- 
tracts. An  infant  or  a  lunatic  has  not  the  power  to 
make  a  contract,  and  therefore  promissory  notes  or  bills 
of  exchange  executed  by  them  have  no  legal  existence. 

B.  Negotiable  Contracts  Void  if  Illegal.  —  We  have 
learned  from  our  discussion  of  contracts  that  mere  ille- 
gality does  not  always  render  a  contract  void.  We 
learned  further  that  where  a  statute  specifically  declares 
a  contract  to  be  void,  or  expressly  forbids  its  creation, 
it  is  void  absolutely.  It  follows  that  the  mere  fact  that 
a  bill  or  note  is  given  for  an  illegal  purpose  will  not 
render  it  invalid.  As  a  general  rule,  illegality  is  not 
an  absolute  defence ;  it  is  classed  as  a  personal  defence ; 
but  if  a  statute  is  passed  which  specifically  provides 
that  bills  or  notes  given  in  payment  for  certain  kinds 
of  debts,  or  under  certain  circumstances,  shall  be  void, 
then  such  bills  or  notes  can  confer  no  rights  whatever 
upon  the  persons  who  have  purchased  them.  In  the 
state  of  Pennsylvania  an  act  has  been  passed  which 
provides  that  promissory  notes  or  bills  of  exchange 
given  in  payment  of  bets  are  void.  No  matter  how 
innocent  the  purchaser  of  such  a  note  may  be,  no  matter 
how  much  he  may  have  paid  for  it  in  good  faith,  he  can 
recover  nothing  upon  it  against  the  maker. 

C.  Extinguishment  by  Cancellation.  —  We  have  seen 
that  if  the  bill  or  note  never  had  a  legal  existence,  it 


NEGOTIATIONS  OF  BILLS  AND  NOTES  217 

can  confer  no  rights  upon  any  persons  whatever.  If, 
though  it  once  had  a  legal  existence,  it  has  been  extin- 
guished, and  in  contemplation  of  law  has  ceased  to  exist, 
we  may  then  apply  the  same  rule.  It  can  no  more  con- 
fer rights  after  being  extinguished  than  if  it  had  never 
existed.  One  of  the  most  common  methods  by  which 
extinguishment  may  be  brought  about  is  by  the  cancel- 
lation of  the  instrument.  If  the  holder  intentionally 
destroys  it,  or  cancels  it  by  tearing  off  his  name  or 
drawing  his  pen  across  it,  this  works  a  legal  extin- 
guishment of  it,  and  no  rights  can  thereafter  be  acquired 
under  it.  If  the  cancellation  was  done  accidentally, 
although  the  paper  may  be  no  longer  in  existence,  the 
contract  is  not  extinguished,  and,  as  has  already  been 
pointed  out,  if  the  holder  of  a  bill  or  note  has  accident- 
ally lost  or  destroyed  it,  he  may  recover,  even  though 
he  is  not  able  to  produce  it,  provided  he  gives  the 
proper  bond  of  indemnity. 

D.  Extinguishment  by  Alteration. — Any  intentional 
material  alteration  made  by  the  holder,  or  by  his  orders, 
without  the  consent  of  the  other  parties,  will  vitiate 
the  instrument.  By  a  material  alteration  is  meant  any 
alteration  which  changes  the  terms  of  the  bill  or  note 
in  a  way  to  affect  the  rights  of  the  parties.  Alterations 
of  the  date,  time  of  payment,  amount  of  the  face  of  the 
instrument,  rates  of  interest,  the  names  of  any  of  the 
parties,  i.e.,  payee,  maker,  drawer,  or  acceptor,  chang- 
ing the  wording  so  as  to  make  a  non-negotiable  instru- 
ment negotiable  or  vice  versa,  changing  a  joint  to  a  joint 
and  several  liability  (except  in  states  where  all  joint 
makers  are  by  statute  to  be  deemed  joint  and  several), 
etc.,  are  all  material  alterations.  Innocent  alterations 
by  the  holder,  even  though  material,  will  not  destroy 


218  NEGOTIABLE  CONTRACTS 

the  note  or  bill.  He  may,  providing  his  act  was  in 
perfect  good  faith,  sue  upon  the  instrument  as  it  was 
originally  drawn.  Alterations  which  do  not  affect  the 
rights  of  the  parties  are  immaterial,  and  have  no  effect 
whatever.  Alterations  made  by  a  stranger  are  con- 
sidered to  be  immaterial  alterations;  they  may  be 
disregarded,  and  the  party  may  recover  on  the  paper 
as  it  was  originally  executed.  If  an  alteration  is 
made  with  the  consent  of  all  the  parties,  a  new  con- 
tract is  made,  and  the  situation  is  precisely  the  same 
as  if  a  new  bill  of  exchange  or  promissory  note  had 
been  drawn. 

E.  Extinguishment  by  Release  or  Re-transfer.  —  The 
third  way  in  which  a  bill  or  note  may  be  extinguished 
is  by  means  of  a  release  by,  or  a  re-transfer  to,  the  maker 
or  acceptor  at,  or  after,  maturity.  The  most  common 
instance  of  this  is  where  the  holder  delivers  up  the 
instrument  to  the  acceptor  or  maker  at  maturity,  on 
payment  of  the  amount  due  upon  it.  When  that  has 
been  accomplished  the  paper  is  legally  a  nullity,  and 
if  through  some  accident  some  one  else  should  obtain 
it  and  put  it  again  in  circulation,  the  party  primarily 
liable  on  it  could  not  again  be  charged.  If  the  acceptor 
or  maker  himself  buys  the  note  before  maturity,  it  is 
not  thereby  extinguished,  for  he  may  himself  again  put 
it  in  circulation  before  it  becomes  due.  But  if  he  keeps 
it  until  maturity,  then  it  does,  at  that  time,  become 
extinguished,  unless  it  appears  that  at  the  time  he 
purchased  it  the  real  title  was  in  some  third  party. 
If  the  person  from  whom  he  purchased  was  not  the 
real  owner,  payment  before  maturity  will  not  pro- 
tect the  maker  or  acceptor,  because  a  payment  before 
maturity  is  not  in  the  regular  course  of  business.     The 


NEGOTIATIONS  OF  BILLS  AND  NOTES  219 

holder,  therefore,  if  he  is  the  party  liable  on  the  instru- 
ment, is  not  accorded  the  same  protection  that  would 
be  given  to  him  if  he  were  a  third  party  who  purchased 
in  the  regular  course  of  business,  even  though  his 
transferor  were  not  the  true  owner. 

As  has  been  explained,  it  sometimes  happens  that 
parties  other  than  the  maker  or  acceptor  are  the  ones 
primarily  liable  on  the  paper,  e.g.,  the  payee  and  first 
indorser  of  a  note  made  for  his  own  accommodation. 
The  question  may  arise  whether  a  re-transfer  of  the 
instrument  to  such  a  party  will  operate  as  an  extin- 
guishment. Some  doubt  as  to  this  point  has  been 
expressed  by  various  writers,  but  it  is  now  pretty  well 
settled  that  payment  at  maturity,  by  an  accommodated 
drawer  or  indorser,  and  a  re-transfer  of  the  instrument 
to  him  will  operate  as  an  extinguishment.  But  a 
re-transfer  to,  and  payment  by,  an  ordinary  drawer 
or  indorser  will  not  work  an  extinguishment  of  the 
paper.  It  may  be  negotiated  further,  and  the  drawer 
or  indorser  who  holds  it  may  sue  the  acceptor  or  maker 
upon  it.  In  order  to  make  the  re-transfer  it  is  not 
necessary  that  the  paper  be  indorsed.  A  mere  delivery 
of  it  to  the  party  primarily  liable  operates  in  law  as  an 
extinguishment. 

4.  Personal  Defences.  —  The  defences  which  we  have 
discussed  are  good  against  any  one,  no  matter  whether 
he  is  an  innocent  purchaser  for  value  or  not.  We  now 
reach  a  class  of  defences  which  are  good  only  when  the 
party  seeking  to  recover  on  the  note  has  had  actual  or 
constructive  notice  of  the  existence  of  the  defence,  or 
when  he  is  one  who  has  given  no  value  for  the  instru- 
ment. That  is  to  say,  if  the  plaintiff  is  what  we  call  an 
innocent  purchaser  for  value,  none  of  the  defences  which 


220  NEGOTIABLE   CONTRACTS 

we  are  now  about  to  take  up  will  be  available  against 
him. 

We  will  first  investigate  the  kinds  and  nature  of  these 
"personal "  defences,  and  then  we  will  ascertain  exactly 
what  is  meant  by  the  phrase  "  an  innocent  purchaser  for 
value."  What  we  may  denominate  personal  defences 
are  those  which  are  peculiar  to  the  individuals  who 
make  the  contract,  which  do  not  travel  with  the  thing 
they  affect,  like  absolute  defences,  but  are  good  only 
as  between  the  original  parties,  or  as  against  others 
who  stand  in  no  better  situation. 

To  revert  to  an  illustration  cited  earlier  in  this 
chapter:  Suppose  A  sells  B  a  horse,  warranted  to  be 
sound.  B  gives  in  payment  a  promissory  note.  The 
horse  turns  out  to  be  unsound,  B  returns  him  to 
A  and  repudiates  his  bargain.  A  sues  him  on  the 
note.  He  cannot  recover.  Why?  Because  B  has  a 
good  defence,  viz.,  that  A  had  made  false  representa- 
tions to  him  about  the  horse,  and  thus  had  obtained 
the  note  by  fraud.  But  suppose  A  sold  or  negotiated 
the  note  to  C.  Now,  you  see  the  defence  of  fraud  is  a 
defence  which  does  not  in  any  way  concern  the  note 
itself;  there  is  nothing  on  its  face  which  would  lead 
any  one  who  was  about  to  purchase  it,  to  believe  or 
to  suspect  that  any  fraud  had  been  committed.  The 
defence  is  one  not  against  the  note  itself,  but  against 
a  recovery  by  A  personally,  by  virtue  of  the  fact  that 
he  has  been  guilty  of  fraudulent  conduct. 

Whether  C  can  recover  or  not  depends  upon  two  cir- 
cumstances. First,  whether  he  knew  at  the  time  he 
purchased  it  of  the  fraudulent  warranty  by  A;  and 
second,  whether  he  gave  value  for  the  instrument.  If 
he  did  not  know  of  the  fraud,  and  if  he  did  give  value, 


NEGOTIATIONS   OF  BILLS  AND   NOTES  221 

then  he  may  recover.  If  either  condition  fails,  he 
cannot,  because,  if  he  either  gave  no  value  or  knew 
of  the  fraud,  he  stands  in  no  better  situation  than  A. 
This  explains  the  nature  of  what  are  known  as  per- 
sonal defences.  This  is  the  great  advantage  which 
negotiable  contracts  have  over  all  others.  They  are 
not  hampered  by  such  defences  as  these. 

F.  Fraud  and  Illegality.  —  We  have  already  suffi- 
ciently explained  the  nature  of  fraud:  it  is  always 
a  personal  defence.  Whenever  one  party  has  induced 
another,  by  means  of  false  representations,  to  execute  a 
bill  or  note,  he  is  guilty  of  fraud  and  cannot  recover 
against  him.  But  any  subsequent  innocent  purchaser 
may  do  so. 

Illegality  has  also  been  thoroughly  discussed  under 
the  subject  of  contracts.  As  we  intimated  when  speak- 
ing of  absolute  defences,  if  an  act  of  legislature  pro- 
vides that  a  certain  class  of  contracts  shall  be  void, 
then,  of  course,  no  rights  are  conferred  by  them.  But 
suppose  A  rents  a  house  to  B  to  use  as  a  distillery, 
the  intention  being  to  manufacture  whiskey  without 
paying  the  taxes  provided  for  by  the  internal  revenue 
laws.  In  payment  of  rent,  B  gives  A  a  promissory 
note.  As  between  A  and  B,  A  could  not  recover, 
because  he  has  made  an  illegal  bargain;  but  if  A 
sold  the  note  to  a  third  party,  who  knew  nothing 
of  the  purpose  for  which  the  note  was  given,  and 
who  paid  value  for  it,  this  third  party  might  collect 
its  amount. 

G.  Payment  before  Maturity.  —  As  already  partially 
explained,  payment  before  maturity  is  a  personal  and 
not  an  absolute  defence.  If  the  note  is  paid  at 
maturity  and  is   not  delivered  to  the  one  primarily 


222  NEGOTIABLE   CONTRACTS 

liable  on  it,  and  is  a  second  time  put  in  circulation, 
there  can  be  no  recovery,  for  a  reason  which  will  be 
explained  when  we  take  up  the  subject  of  overdue 
paper.  But  payment  before  maturity  is  no  defence,  if 
the  note  again  be  put  in  circulation  and  comes  into  the 
hands  of  an  innocent  purchaser  for  value,  prior  to  the 
day  on  which  it  falls  due.  When  a  maker  or  acceptor 
pays  a  note  or  bill  under  such  circumstances,  — and  in 
fact  always, —  he  should  demand  and  insist  upon  having 
the  instrument  delivered  up  to  him.  He  cannot  be 
compelled  to  pay,  if  it  is  not  so  delivered,  unless  the 
plaintiff  will  give  a  bond  of  indemnity  to  save  him 
from  all  loss. 

H.  Duress.  —  In  the  section  of  this  book  relating  to 
the  subject  of  contracts,  we  discussed  the  nature  of  what 
is  known  as  duress.  It  is  very  similar  to  fraud,  and  is 
the  same  kind  of  a  defence.  As  against  the  party  who 
was  guilty  of  the  act  of  duress,  it  is  a  perfect  defence ; 
as  against  a  party  who  is  an  innocent  purchaser  for 
value,  it  is  no  defence  at  all. 

I.  Absence  of  Consideration.  —  Absence  of  considera- 
tion is  a  good  defence  as  between  the  original  parties, 
and  as  against  any  plaintiff  who  has  had  notice.  If, 
however,  the  note  is  an  accommodation  note,  the  one 
primarily  liable  may  be  held  by  any  third  party,  even 
though  he  may  have  had  notice.  The  reason  for  the 
distinction  between  the  case  where  the  note  is  given 
intentionally  without  consideration,  i.e.,  for  the  accom- 
modation of  the  payee,  and  where  it  is  given  with  the 
intention  of  receiving  consideration,  though  none  is  ever 
actually  received,  is  as  follows.  Where  the  note  is  an 
accommodation  note,  the  maker  agrees,  by  the  very  terms 
of  his  contract,  to  pay  to  any  third  party  (though  not 


NEGOTIATIONS   OF  BILLS  AND  NOTES  223 

to  the  payee)  the  amount  of  the  note  at  maturity, 
without  any  consideration.  This  being  true,  it  is 
thought  just  that  he  should  be  compelled  to  pay  at  the 
instance  of  any  third  party,  even  though  that  third 
party  may  have  had  notice  of  the  nature  of  the  contract. 
But  if  the  payee  demands  the  money,  the  lack  of  con- 
sideration is  a  good  defence. 

If  the  note  is  not  an  accommodation  note,  but  no  con- 
sideration is  actually  given,  the  defence  is  good,  as 
against  the  payee  and  all  who  are  not  innocent  pur- 
chasers for  value.  A  gave  B  a  note  for  one  hundred 
dollars,  the  understanding  between  them  being  that  B 
would  allow  A  one  hundred  dollars'  worth  of  credit  at 
his  store.  B  refused  to  allow  the  credit.  After  his 
death  his  executors  sued  A  on  his  note.  The  court 
refused  a  recovery.  The  defence  of  no  consideration 
was  held  good. 

J.  Failure  of  Consideration.  —  Failure  of  considera- 
tion differs  from  lack  of  consideration.  Lack  of  con- 
sideration means  that  no  consideration  ever  passed  be- 
tween the  parties.  Failure  of  consideration  means  that 
a  consideration  was  given,  but  that,  for  no  fault  of  the 
maker  of  the  instrument,  it  has  turned  out  to  be  of 
no  value.  A  sells  B  a  lot  of  ground,  in  payment  for 
which  B  gives  a  promissory  note.  It  turns  out  that  the 
title  which  A  gave  is  valueless  —  the  consideration  has 
failed.  This  is  a  good  defence  as  against  the  original 
party  to  the  contract,  or  any  one  not  an  innocent  pur- 
chaser for  value. 

5.  Peculiar  Rules  governing  the  Transfer  of  Title  of  Nego- 
tiable Paper.  —  Having  discussed  some  of  the  defences 
known  as  personal  defences,  we  will  try  to  ascertain 
against  what  persons  such  defences  are  available.     We 


224  NEGOTIABLE   CONTRACTS 

have  already  learned  that  they  are  good  as  against  any 
one  not  "an  innocent  purchaser  for  value."  An  inno- 
cent purchaser  for  value  stands  in  a  peculiar  position. 
As  a  general  rule  of  law,  one  who  has  no  title  can  give 
none.  If  you  steal  my  horse  and  sell  him  to  A,  I  can 
go  to  A  and  reclaim  him,  or  if  A  has  sold  him  again,  I 
may  force  A  to  pay  me  his  value.  Why  ?  Because  the 
horse  never  ceased  to  be  mine.  You  get  no  title  by 
your  theft,  hence  you  can  give  none  to  A.  But  the 
rule  is  different  with  property  which  the  law  wishes  to 
circulate  freely.  If  you  steal  my  money  and  use  it  in 
paying  a  debt  to  A,  I  cannot  reclaim  it,  because  from  its 
nature  the  title  will  pass  to  any  one  who  gives  value  in 
exchange.  Very  nearly  the  same  principles  apply,  by 
virtue  of  "the  custom  of  merchants,"  to  commercial 
paper.  If  I  lose  a  note  which  is  transferable  by  deliv- 
ery and  it  is  sold  for  value  to  you,  you  become  the 
owner  and  may  sue  the  maker.  You  acquire  a  title 
because  you  are  an  innocent  purchaser  for  value,  in 
spite  of  the  fact  that  the  one  who  sold  to  you  had  no 
title. 

6.  An  Innocent  Purchaser  for  Value  must  Purchase  in 
the  Regular  Course  of  Business.  — We  now  come  to  the 
question,  Who  is  an  innocent  purchaser  for  value  ? 
The  first  essential  is  that  he  must  be  a  purchaser  in  the 
regular  course  of  business.  If  the  paper  is  transferable 
by  delivery  alone,  then  delivery  is  sufficient.  If  not 
transferable  by  delivery,  it  must  have  been  properly 
indorsed  by  one  who  was  the  legal  owner  at  that  time. 
The  greater  number  of  cases  where  a  purchaser  for 
value,  without  notice,  gets  a  title  good  against  some 
one  else  equally  entitled  to  it,  are  cases  where  the 
paper  is  transferable  by  delivery.     In  all  other  cases 


NEGOTIATIONS  OF  BILLS  AND  NOTES  225 

but  little,  if  any,  opportunity  arises  for  such  a  result. 
If  the  indorsement  is  made  by  one  incapable  of  making 
it,  the  purchaser  gets  no  title  at  all,  e.g.,  if  the  indorse- 
ment be  made  by  a  lunatic  or  an  unauthorized  agent. 
If  it  is  a  forgery  the  indorsee  gets  no  title.  All  steps 
in  the  transfer  must  be  regular  before  the  transferee 
becomes  a  purchaser  at  all. 

7.  Purchaser  must  have  Given  Value.  —  The  second 
essential  element  of  an  innocent  purchaser  for  value  is 
that  he  shall  give  value  for  the  instrument.  This  does 
not  mean  that  he  must  pay  in  money,  or  its  equivalent, 
the  actual  value  of  the  instrument,  but  that  he  must 
have  parted  with  something  of  value  in  exchange  for  it. 
You  remember  when  we  were  discussing  contracts,  we 
dwelt  for  some  time  on  the  nature  of  consideration,  and 
we  saw  that  consideration  consists  of  any  benefit  at  all 
to  the  one  party  or  any  detriment  to  the  other  —  and  by 
benefit  and  detriment  we  meant  such  as  might  be  meas- 
ured or  expressed  in  money  value. 

About  the  same  principles  may  be  applied  to  ascer- 
tain what  is  meant  by  value  in  this  connection.  If  one 
gives  money  or  other  negotiable  securities,  or  enters 
into  liabilities  of  any  kind,  in  consideration  of  the  sale 
of  negotiable  paper  to  him,  he  pays  value  for  it.  If  he 
agrees  to  refrain  from  suing  a  person  against  whom  he 
has  a  cause  of  action,  or  does  any  act  tending  to  preju- 
dice his  own  interest,  he  gives  value. 

In  cases  where  a  promissory  note,  or  bill  of  exchange, 
is  transferred  in  cancellation  of  a  preexisting  debt,  there 
is  a  conflict  of  authority.  One  view  is  that  the  pay- 
ment of  a  debt  by  a  note  or  bill  does  not  actually  extin- 
guish the  debt,  but  only  suspends  it  until  such  time 
as  it  may  be  ascertained  whether  the  bill  or  note  is 


226  NEGOTIABLE  CONTRACTS 

paid  at  maturity,  when,  if  it  is  not,  the  original  debt 
will  revive ;  and  that,  such  being  the  case,  the  creditor 
has  suffered  no  detriment  and  therefore  has  given  no 
consideration.  The  other  view  is,  that  whether  the  bill 
or  note  taken  in  payment  of  a  preexisting  debt  is  paid 
or  not,  the  purchaser  has  either  extinguished  his  debt 
altogether  or  has  delayed  prosecuting  his  remedy,  and 
in  either  case  he  has  given  value.  The  latter  seems  to 
be  the  sounder  view.  If  paper  is  given  as  collateral 
security  for  the  payment  of  a  preexisting  debt,  the 
transferee  is  not  a  purchaser  for  value. 

8.  Purchaser  must  be  Innocent.  —  Finally  we  ask,  What 
do  we  mean  by  an  "innocent"  purchaser?  By  this  we 
mean  a  purchaser  who  has  no  notice  of  any  personal 
defences  which  might  be  interposed  by  the  party  liable 
on  the  paper.  This  notice  may  be  actual  knowledge, 
or  what  is  known  as  "  constructive  "  notice.  Of  course, 
if  the  purchaser  actually  knows  or  is  informed  that  such 
a  defence  as  fraud  or  duress  is  liable  to  be  set  up,  he  is 
not  "innocent."  It  sometimes  happens,  however,  that 
the  purchaser  does  not  actually  know  of  these  defences, 
but  shuts  his  eyes  to  facts  which  he  might  have  dis- 
covered by  means  of  a  little  investigation.  If  he  knows 
such  facts  as  ought  to  put  him  on  inquiry  as  to  the  char- 
acter of  the  paper  with  which  he  is  dealing,  but  at  the 
same  time  studiously  refrains  from  making  such  an  in- 
vestigation as  any  ordinarily  careful  man  would  make,  he 
maybe  charged  with  actual  notice  of  the  facts  which,  if 
he  had  used  reasonable  diligence,  he  might  have  discov- 
ered. When  we  say  "charged  with  notice,"  we  mean 
that  he  is  presumed  to  have  had  actual  notice,  and  will 
be  treated  as  if  he  had  had  it.  The  purchaser  is  charged' 
with  "constructive"  notice  of  all  defences  which  could 


NEGOTIATIONS  OF  BILLS  AND  NOTES  227 

be  ascertained,  or  which  would  naturally  be  surmised 
from  a  perusal  of  the  face  of  the  instrument.  Thus, 
a  purchaser  is  charged  with  notice  of  the  character  of 
the  indorsement,  if  the  bill  or  note  has  been  altered 
or  mutilated  in  any  way,  or  if  there  are  unfilled  blanks 
in  it,  etc. 

9.  Overdue  Paper.  —  This  concludes  our  discussion  of 
the  negotiation  of  paper  prior  to  maturity.  We  now 
take  up  the  question  of  the  effect  of  the  negotiation  of 
overdue  or  dishonored  paper.  It  is  obvious  that  if  a 
man  purchases  paper  which  has  already  been  dishonored, 
he  is  not  an  innocent  purchaser.  He  is  charged  with 
constructive  notice  of  the  date  of  the  bill,  and  therefore 
is  presumed  to  know  that  it  is  overdue.  Overdue  paper 
may  be  transferred,  but,  with  one  exception,  the  trans- 
feree takes  it  subject  to  all  defences  that  could  have 
been  urged  against  his  transferor.  Where  the  defend- 
ant, maker,  or  acceptor  has  a  debt  owing  to  him  by  the 
plaintiff's  transferor,  which  he  could  have  set  off  in 
an  action  by  the  transferor,  that  gives  him  no  right  to 
set  off  the  debt  in  an  action  by  the  transferee.  Aside 
from  this  one  consideration,  the  purchaser  buys  at  his 
own  risk. 

Now,  a  word  as  to  what  is  meant  by  overdue  paper. 
If  the  note  is  payable  at  a  particular  time,  it  is  overdue 
after  the  day  of  maturity.  In  countries  where  days 
of  grace  are  allowed,  the  paper  is  not  overdue  until 
after  the  last  day  of  grace  has  expired.  Paper  payable 
at  no  fixed  time,  but  on  demand,  is  overdue  after 
demand,  or,  without  demand,  after  the  expiration  of  a 
reasonable  time. 


CHAPTER  IX 

CONFLICT  OF  LAWS 

A.  How  Rules  conflict  in  Different  States.  —  In  connec- 
tion with  the  subject  of  bills  and  notes,  and  the  rules 
which  govern  their  negotiability,  etc.,  it  will  be  almost 
necessary  to  deal,  at  least  briefly,  with  what  is  known 
as  conflict  of  laws.  It  may  happen  that  a  bill  of 
exchange  is  drawn  in  New  York  upon  a  man  living 
in  Pennsylvania,  directing  him  to  pay  a  sum  of  money 
to  a  third  party,  who  lives  in  Delaware.  The  payee 
may  negotiate  the  instrument  in  Maryland,  and  the 
parties,  when  they  fall  into  a  dispute  about  it,  may  live 
in  New  Jersey.  The  laws  of  New  York,  New  Jersey, 
Pennsylvania,  Maryland,  and  Delaware  may  not  be  uni- 
form on  all  questions  coming  up  for  decision,  and  the 
query  naturally  arises,  What  law  is  to  govern  ?  The 
law  of  one  state  will  govern  some  questions  and  the  law 
of  other  states,  others  —  it  depends  on  the  precise  nature 
of  the  point  in  dispute.  In  order  that  we  may  deal 
intelligently  with  such  a  case  as  the  one  we  have 
indicated,  it  will  be  necessary  for  us  to  have  some 
knowledge  as  to  the  law  governing  each  question. 

B.  Summary  of  Rules.  —  We  will  here  append  a  brief 
summary  as  to  which  law  governs  each  particular  ques- 
tion that  may  come  up  for  dispute.  The  law  of  the  place 
where  the  contract  is  made,  which  in  our  illustration 


CONFLICT  OP  LAWS  229 

is  New  York,  governs  all  questions  relating  to  the 
making  of  the  contract.  Whether  the  instrument  is 
negotiable  or  not,  and  whether  it  is  properly  drawn  up, 
are  questions  to  be  determined  by  New  York  law.  The 
law  of  the  state  where  the  contract  is  to  be  performed, 
which  in  our  illustration  is  Pennsylvania,  governs  the 
liability  of  the  maker  of  a  note  or  the  acceptor  of  a  bill. 
The  law  of  that  state  also  determines  whether  days  of 
grace  are  allowed,  and  whether  or  not  it  is  necessary  to 
protest  the  bill  for  dishonor.  The  law  of  the  state 
where  the  bill  or  note  is  indorsed,  Maryland,  governs 
the  question  as  to  whether  the  title  has  passed  to  the 
present  holder.  All  questions  relating  to  the  transfer 
of  the  instrument  are  determined  by  the  law  of  that 
state.  Lastly,  the  law  of  the  state  where  the  action 
is  brought,  New  Jersey,  governs  all  questions  con- 
cerning the  admissibility  of  evidence,  and  all  questions 
concerning  the  statutes  of  limitations,  or  any  other  stat- 
utory laws  bearing  upon  the  liabilities  of  the  parties. 


CHAPTER  X 

CHECKS 

1.  A  Check  is  a  Bill  of  Exchange.  — A  check  is  a  spe- 
cies of  negotiable  paper,  differing  slightly  from  both  a 
bill  of  exchange  and  a  promissory  note.  It  is  really  a 
bill  of  exchange  of  a  peculiar  kind.  It  differs  from 
the  ordinary  bill  in  that  it  must  be  drawn  on  a 
bank,  it  is  payable  on  demand,  and  no  acceptance  is 
required. 

2.  Liability  of  the  Drawer.  —  The  drawer  of  the  check 
is  liable  for  its  payment,  and  no  delay  or  failure  to 
notify  him  will  excuse  him,  except  in  so  far  as  he  has 
actually  been  damaged  by  the  delay.  Suppose  you  pay 
by  check  a  debt  which  you  owe  to  me.  I  am  careless, 
and  fail  to  demand  payment  within  a  reasonable  time. 
Meanwhile  the  bank  fails.  I  cannot  charge  you  for  the 
amount.  I  have  lost  it  through  my  own  carelessness  and 
must  suffer  the  consequences.  But  the  mere  fact  that  the 
payee  of  a  check  delays  in  presenting  it  until  perhaps 
the  drawer  has  withdrawn  his  funds,  will  not  relieve 
the  latter  from  liability.  In  order,  however,  to  protect 
yourself  from  any  possibility  of  loss,  you  should  deposit 
a  check  as  soon  as  you  get  it. 

3.  Liability  of  the  Drawee.  —  The  drawee,  the  bank 
upon  which  the  check  is  drawn,  is  not  liable  at  all  to 

230 


CHECKS  231 

the  payee  for  its  payment.  The  drawee  of  an  ordinary 
bill  is  not  liable  until  he  has  accepted,  and,  as  has  been 
said,  the  drawee  of  a  check  does  not  accept  at  all.  The 
check  is  an  order  to  the  drawee,  directing  him  to  pay  a 
certain  amount  to  the  holder  of  the  check,  using  for 
that  purpose  funds  belonging  to  the  drawer;  the  latter, 
by  his  action  in  drawing  the  check,  merely  designates 
the  bank  as  his  agent  to  pay  a  certain  sum  to  the  payee. 
If  the  bank  refuses  to  pay  at  a  time  when  it  has  funds 
of  the  drawer  for  that  purpose,  and  thus  hurts  his  credit, 
it  may  render  itself  liable  in  an  action  of  tort  for  the 
injury  which  it  has  done  to  him.  But  the  payee  has 
no  right  whatever  to  sue  it  for  its  failure  to  pay  him ; 
the  payment  of  the  check  is  a  matter  which  lies  solely 
between  the  drawer  and  the  payee. 

4.  Certified  Checks.  — If,  however,  the  holder  of  a 
check  takes  it  to  a  bank  and  has  it  certified,  he  then 
has  a  valid  claim  against  the  latter.  When  a  bank  cer- 
tifies a  check,  the  proper  officer,  president  or  cashier, 
indorses  it  "Good,"  with  his  signature  or  stamp. 
This  is  equivalent  to  accepting  it.  At  the  time  when 
a  bank  certifies  a  check,  it  sets  aside  sufficient  funds 
belonging  to  the  drawer  to  pay  the  amount  mentioned 
therein.  These  funds  then  become  the  property  of  the 
holder  of  the  certified  check,  and  from  that  time  he  has 
a  perfect  cause  of  action  against  the  bank.  If  at  any 
subsequent  time  it  refuses  to  pay  his  check  on  demand, 
he  may  sue  and  recover  the  full  amount.  The  liability 
of  the  drawer  ceases  from  the  moment  the  check  has 
been  certified. 

5.  Liability  of  Indorser.  —  If  the  check  is  indorsed 
to  a  third  party  by  the  payee,  as  it  may  be  in  the  usual 
manner,  the  indorser  guarantees  the   payment  of  the 


232  NEGOTIABLE   CONTRACTS 

check  in  the  same  way  that  the  indorser  of  a  bill  or 
note  guarantees  its  payment,  and  his  liability  is  sub- 
stantially similar.  If  he  wishes  to  pass  the  title  with- 
out subjecting  himself  to  liability,  he  may  indorse 
"without  recourse."  In  such  cases  the  effect  of  his 
indorsement  is  simply  to  pass  title,  — he  himself  is  not 
in  any  way  responsible  for  the  payment  of  the  check. 


PAKT  V 
CONTRACTS   OF  COMMON  CARRIERS 


SECTION   I 
CAKBIERS  OF  GOODS 


CHAPTER   I 

ESSENTIAL   CHARACTERISTICS   OF   COMMON   CARRIERS 

1.  Nature  of  a  Public  Calling.  —  The  contracts  which 
have  been  discussed  thus  far  concern  only  those  persons 
who  are  directly  parties  to  them.  Such  contracts  may  be 
called  private  contracts,  as  distinguished  from  those 
in  which  the  public  has  an  interest.  It  may  seem 
strange  that  the  public  could  be  concerned  in  a  con- 
tract between  one  man  and  another,  but  there  are  some 
kinds  of  contracts  which,  by  their  nature,  do  concern 
the  public  at  large.  If  an  individual,  or  a  collection  of 
individuals,  exercises  what  is  known  as  a  public  call- 
ing, if  they  offer  to  serve  the  public,  the  contracts 
which  they  make  with  the  public,  and  the  manner  in 
which  they  exercise  their  obligations,  must  be,  to  a 
greater  or  less  extent,  controlled  by  law.     An   inn- 

233 


234  CONTRACTS  OF  COMMON  CARRIERS 

keeper  is  one  who  exercises  a  public  calling.  He  offers 
to  house  and  feed  any  member  of  the  public  for  a  stipu- 
lated price.  His  obligations  toward  his  guests  are 
always  regulated  by  law,  and  he  is  bound  to  receive  all 
proper  persons  who  apply  to  him.  The  public  is  suffi- 
ciently interested  in  the  contracts  which  he  makes  to 
stipulate  that  any  one  of  their  number  who  comes  to 
him  with  the  proper  price,  and  at  the  proper  time,  shall 
be  accommodated. 

2.  A  Common  Carrier  exercises  a  Public  Calling.  —  One 
of  the  most  common  examples  of  one  who  is  engaged  in 
a  public  calling  is  the  common  carrier.  A  man,  or  a  cor- 
poration, carrying  goods  or  passengers  from  place  to 
place  for  a  compensation,  exercises  a  calling  distinctively 
public.  His  business  is  to  serve  the  public,  his  profit  is 
derived  from  the  public,  and  the  public  in  general  holds 
him  accountable  for  his  actions  toward  those  of  their 
number  who  have  entered  into  contracts  with  him. 
The  subject  of  common  carriers  therefore  presents  a  new 
situation.  We  must  first  ascertain  what  are  the  rights 
and  liabilities  of  this  person  whose  business  it  is  to 
serve  the  public,  before  we  are  able  to  interpret  his 
contracts. 

3.  Definition  of  "Common  Carrier."  —  A  common  car- 
rier is  "one  who  undertakes,  for  hire  or  reward,  to 
transport  the  goods  of  such  as  choose  to  employ  him, 
from  place  to  place."  One  essential  characteristic  of 
the  common  carrier  is  that  he  offers  himself  to  the  public 
generally  as  a  carrier  of  goods  —  that  he  stands  ready  to 
transport  the  merchandise  of  any  proper  person  who 
applies  to  him  and  agrees  to  pay  him  his  price.  Another 
essential  characteristic  is  that  the  carrying  of  goods  must 
be  for  a  consideration.     One  who  enters  into  a  special 


CHARACTERISTICS  OF  COMMON   CARRIERS        235 

contract  to  carry  your  goods  from  one  place  to  another, 
does  not  thereby  render  himself  a  common  carrier,  nor 
does  a  man  who  carries  the  goods  of  every  one  free  of 
charge.  The  two  essentials  must  be  present  to  estab- 
lish this  peculiar  character. 

4.  Distinction  between  Private  Carrier  and  Common 
Carrier.  —  It  is  often  very  difficult  to  tell  whether  a 
carrier  has  become  a  common  carrier  or  whether  he  is 
an  ordinary  private  carrier.  A,  a  farmer,  was  accus- 
tomed to  draw  his  produce  to  a  country  town  several 
miles  away  from  his  home.  On  his  return  trip  he 
often  carried  parcels  from  the  town  to  his  neighbors, 
from  whom  he  received  a  consideration.  He  was  always 
willing  to  perform  this  service  when  requested.  Hav- 
ing lost  some  of  the  goods  which  he  was  carrying,  the 
question  arose  whether  he  could  be  held  responsible 
as  a  common  carrier.  Ordinarily  he  could  not,  be- 
cause he  did  not  hold  himself  out  to  the  public  as 
a  carrier  of  goods.  This  was  not  his  business,  it 
being  merely  incidental  to  his  journey  to  town  that  he 
carried  parcels  for  his  neighbors.  It  is  very  important 
to  know  whether  a  carrier  is  a  common  or  private  car- 
rier, because  his  responsibility,  if  he  has  lost  some  of 
the  goods  which  he  was  carrying,  is  very  different  in 
these  two  cases.  As  we  shall  learn  later,  a  private  car- 
rier is  not  held  so  strictly  to  account  for  the  safety  of 
the  goods  as  is  the  common  carrier. 

5.  Common  Carrier  need  not  Make  an  Unlimited  Offer.  — 
When  we  say  that  to  be  a  common  carrier  one  must 
hold  himself  out  to  the  world  generally  as  a  carrier  of 
goods,  —  we  are  now  speaking  of  carriers  of  goods  only, 
not  carriers  of  passengers, — we  do  not  mean  that  he 
must  hold  himself  out  as  a  carrier  of  all  kinds  of  goods, 


236  CONTRACTS  OF  COMMON  CARRIERS 

or  as  a  carrier  to  all  places.  A  man  may  engage  in  the 
business  of  carrying  wheat  from  Philadelphia  to  New 
York,  and  be  a  common  carrier.  He  would  not  be 
compelled  to  carry  anything  but  wheat,  nor  between 
any  points  except  Philadelphia  and  New  York;  and 
yet  between  those  two  places  he  is  just  as  much  a 
common  carrier  as  though  he  stood  ready  to  carry  any- 
thing anywhere. 

Perhaps  the  main  test  as  to  whether  a  man  is  a  com- 
mon carrier  is  whether  his  carrying  is  habitual  or 
merely  occasional.  If  it  is  habitual,  the  inference  is 
that  he  holds  himself  out  to  the  public  as  a  common 
carrier;  if  it  is  only  occasional,  the  inference  is  the 
other  way.  Some  of  the  more  frequent  instances  of 
common  carriers  are  railroad  companies,  steamboat  com- 
panies, and  express  companies.  Any  person  or  cor- 
poration making  a  business  of  carrying  goods  in  the 
same  manner  as  those  we  have  mentioned,  is  a  com- 
mon carrier.  A  tug-boat  is  not  a  common  carrier, 
for  it  does  nothing  except  tow  other  vessels ;  nor  is  a 
railroad  company  a  common  carrier  when  it  merely 
hauls  a  train  belonging  to  another  company.  In  order 
to  be  held  to  the  responsibility  of  the  common  carrier 
in  a  particular  case,  the  carrier  must  have  entire  con- 
trol over  the  goods  which  he  is  transporting.  The 
fact  that  he  does  have  such  complete  control  over  the 
goods  explains,  in  a  large  measure,  his  strict  account- 
ability. 


CHAPTER   II 

DUTIES  OF   COMMON  CARRIER  TOWARD  THE  PUBLIC 

1.  Duty  to  Carry  for  All  who  Apply.  —  The  common 
carrier  makes  his  living  entirely  out  of  the  patronage 
of  the  public,  and  in  return  the  law  holds  him  to  certain 
duties  toward  the  public.  The  first  of  these  is  the  duty 
to  accept  and  transport  all  goods  which  are  offered  to 
him,  provided  the  goods  are  those  which  he  is  accus- 
tomed to  carry,  provided  they  are  in  proper  condition 
for  transportation,  and,  lastly,  provided  he  is  paid  the 
price  of  their  carriage.  If,  when  all  these  provisions 
have  been  complied  with,  the  carrier  refuses  to  trans- 
port the  goods  which  are  offered  to  him,  he  may  be 
punished  by  being  compelled  to  pay  heavy  damages  to 
the  person  who  has  been  refused. 

It  should  be  noted,  however,  that  when  the  goods 
tendered  are  not  of  the  kind  which  the  carrier  holds 
himself  out  as  being  ready  to  transport,  he  is  not  com- 
pelled to  accept  them.  An  express  company  is  not 
compelled  to  carry  dogs.  The  proprietor  of  a  line  of 
stage-coaches  will  not  be  compelled  to  carry  a  box  of 
dynamite.  A  railroad  company  could  not  be  compelled 
to  accept  goods  which  are  improperly  packed,  or  de- 
livered to  them  in  such  condition  that  they  would  be 
damaged  before  the  end  of  the  journey,  and  thus  subject 
the  company  to  the  liability  of  being  sued  for  damages. 

237 


238  CONTRACTS  OF  COMMON  CARRIERS 

Moreover,  the  carrier  is  not  liable  for  his  refusal  to 
carry  goods  if,  through  no  negligence  of  his  own,  he  has 
not  the  facilities  for  doing  so.  It  frequently  happens, 
in  case  of  a  sudden  rise  in  the  price  of  wheat,  that 
many  thousands  of  carloads  will  be  offered  for  ship- 
ment to  a  railroad  at  the  same  time.  If  the  company 
refuses  to  accept  a  portion  of  the  wheat  because  it  has 
not  cars  enough  to  carry  it,  no  action  will  lie,  on  account 
of  such  refusal.  In  some  states,  if  the  company  has  been 
negligent  in  not  providing  sufficient  cars,  or  rather  in 
not  providing  as  many  cars  as  would  naturally  be  ex- 
pected to  be  needed  at  that  time,  it  is  held  responsible. 
This,  however,  is  not  the  rule  everywhere. 

2.  Duty  not  to  Discriminate.  —  Common  carriers  are 
also  under  an  absolute  duty  to  treat  in  the  same  manner 
all  persons  who  become  their  customers.  They  cannot 
make  unjust  discriminations  between  parties  who  offer 
goods  for  transportation.  They  are  at  liberty  to  charge 
lower  rates  for  larger  contracts,  but  they  are  not  at  lib- 
erty to  discriminate  between  individuals  merely  because 
of  the  personality  of  him  who  tenders  the  goods,  or 
on  account  of  the  particular  class  of  goods  which  is 
offered.  If  the  carrier  does  make  such  discrimination, 
the  injured  party  may  apply  to  the  courts  for  redress. 

Some  states  have  gone  so  far  as  to  pass  laws  prohibit- 
ing the  railroad  companies  from  charging  different  pro- 
portionate rates  for  "  long  hauls  "  and  for  "short  hauls." 
These  laws,  however,  have  been  held  to  be  unconsti- 
tutional, and  therefore  void,  because  they  interfere  with 
the  legitimate  business  of  the  railroad.  The  courts 
have  decided  that  it  is  entirely  just  for  the.  road  to 
charge  a  lower  proportionate  price  for  a  long  haul  than 
for  a  short  haul. 


DUTIES  OF  COMMON  CARRIER  TO  THE  PUBLIC    239 

One  of  the  most  bitter  fights  over  this  question  was 
precipitated  when  the  railroad  companies  attempted  to 
discriminate  against  oil  merchants  who  were  not  allied 
with  the  Standard  Oil  Company.  Owing  perhaps 
to  some  arrangement  between  this  great  corporation 
and  the  railroads,  and  very  probably  because  a  large 
amount  of  the  stock  of  the  railroads  was  owned  by 
the  corporation,  higher  rates  were  asked  for  oil  offered 
for  shipment  by  small  companies  than  were  charged  for 
that  offered  by  the  Standard  Oil  Company.  In  some 
cases  the  railroads  refused  to  ship  the  oil  at  all,  alleg- 
ing that  they  had  not  sufficient  cars,  or  that  no  siding 
could  be  put  in  at  the  points  of  shipment  or  deliv- 
ery, and  other  excuses  more  or  less  insincere.  The 
courts  decided  in  favor  of  the  smaller  oil  producers,  but 
the  decision  helped  them  very  little,  as  there  are  a 
number  of  ways  in  which  railroads  can  discriminate 
without  really  transgressing  the  law.  One  of  the  most 
common  ways  is  a  general  regulation  that  no  oil  shall 
be  carried  except  in  cars  belonging  to  the  shipper.  A 
huge  corporation  like  the  Standard  Oil  Company  could 
afford  to  own  its  own  cars,  while  smaller  companies 
could  not  possibly  do  so.  These  rules,  while  not  tech- 
nically a  discrimination,  really  operate  Yery  much 
to  the  injury  of  the  smaller  companies. 

3.  Duty  to  charge  Reasonable  Prices.  —  Railroad  com- 
panies, in  fact  common  carriers  of  all  kinds,  are  also 
under  a  duty  to  the  public  not  to  charge  exorbitant 
prices.  It  may  seem  as  if  it  were  an  unwarrantable 
interference  for  the  law  to  step  in  and  dictate  what  prices 
they  should  charge,  but  when  the  public  at  large  is  inter- 
ested and  the  public  welfare  is  directly  at  stake,  the  law 
does  have  the  power  to  make  such  regulations.     Laws 


240  CONTRACTS  OF  COMMON  CARRIERS 

have  been  passed  in  many  of  the  states  of  the  Union, 
which  fix  a  maximum  charge  for  the  carriage  of  freight 
upon  the  railroads  within  the  limits  of  the  state.  If 
the  law  fixes  the  rate  at  an  amount  so  low  as  to  render 
the  business  of  the  railroad  unprofitable,  it  will  be 
declared  unconstitutional  because  it  destroys  the  busi- 
ness of  the  corporation;  but  as  long  as  the  maximum 
price  named  in  the  statute  is,  in  the  opinion  of  the 
courts,  a  reasonable  priee,  the  railroads  are  compelled 
to  conform  to  it.  In  a  similar  manner,  the  rates  of  fare 
for  cabs  and  street  cars  have  been  regulated  in  many 
cities.  In  some  parts  of  the  West  the  rates  of  storage 
to  be  charged  by  the  own  era  of  warehouses  for  storing 
grain  are  also  fixed  by  law. 

In  some  parts  of  the  country  railroad  commissions 
are  appointed,  who  have  general  oversight  of  the  busi- 
ness of  transportation  in  the  state.  They  see  that 
reasonable  prices  are  charged,  reasonable  regulations 
made,  proper  facilities  offered,  etc.  This,  perhaps, 
leads  us  to  doubt  whether  we  are  not  drifting  too  far  in 
the  direction  of  "paternalism,"  —  a  general  term  used 
to  designate  the  policy  of  a  government  which  closely 
regulates  the  business  carried  on  within  its  borders. 
In  many  countries  of  Europe  the  governments  own, 
and  entirely  control,  the  conduct  of  railways  and  simi- 
lar quasi-public  corporations. 


CHAPTER  III 

LIABILITY  OF  COMMON  CARRIER 

1.  When  Liability  Attaches. — The  responsibility  which 
attaches  to  the  carriage  of  goods  by  a  common  carrier  is 
much  greater  than  that  which  attaches  to  the  carriage 
of  goods  by  one  who  is  a  private  carrier.  We  first  ask, 
When  do  these  responsibilities  as  a  common  carrier  be- 
gin? The  liability  of  the  common  carrier  begins  as 
soon  as  the  goods  are  delivered  into  his  possession  and 
accepted  by  him  for  transportation.  The  only  point  of 
difficulty  which  can  arise  in  this  connection  is  to  deter- 
mine when  the  goods  have  been  accepted.  Sometimes 
this  question  is  involved  in  more  or  less  doubt. 

A  took  a  box  of  goods  to  a  railway  station,  intend- 
ing to  send  it  by  the  next  train.  Finding  no  one  at 
the  station,  he  put  the  box  on  the  platform,  and  went 
away,  leaving  it  there.  It  was  removed  and  lost,  and 
the  question  arose  whether  or  not  the  company  had 
accepted  the  box  for  transportation.  That  would  de- 
pend upon  custom :  if  it  was  usual  for  boxes  to  be  left 
at  that  place,  and  the  company  was  accustomed  to  ac- 
cept them  in  that  manner,  it  might  be  held  responsible 
as  a  common  carrier ;  otherwise,  it  would  not.  If  goods 
are  left  at  the  warehouse  of  the  railroad  company,  with 
the  understanding  that  they  are  not  to  be  shipped  for 
some  days,  the  company  is  not  a  common  carrier  as  to 

241 


242  CONTRACTS  OF  COMMON  CARRIERS 

those  goods  until  the  time  for  shipment  arrives.  Until 
then  he  is  simply  the  custodian  of  the  goods,  and  as 
such  is  under  a  lesser  liability,  which  is  known  as  the 
liability  of  the  "warehouseman." 

2.  Common  Carrier  an  Insurer  of  the  Goods.  —  We  may 
now  inquire,  What  is  the  responsibility  of  the  common 
carrier,  presuming  that  it  has  been  incurred?  Suppose 
you  deliver  goods  to  a  railroad  company  to  carry  from 
Chicago  to  New  York.  The  goods  do  not  arrive  at 
New  York,  but  are  lost,  no  one  knows  where  or  how: 
Can  you  charge  the  company  with  the  loss,  or  must  you 
first  prove  that  it  was  due  to  some  fault  on  the  part  of 
its  officers  ?  The  latter  is  unnecessary.  By  the  con- 
tract of  carriage,  common  carriers  absolutely  agree  that 
they  will  carry  goods  safely  from  the  place  where  they 
are  delivered  to  them  to  their  destination.  If  they  fail 
to  do  so,  they  are  responsible  for  the  value  of  the  arti- 
cles, no  matter  how  they  may  have  been  lost,  subject 
to  one  or  two  exceptions,  which  we  will  take  up  here- 
after. The  point  here  insisted  upon  is,  that  it  is  not 
necessary  that  the  carrier  be  shown  to  be  negligent. 
He  is  said  to  be  an  insurer  of  the  safety  of  the  goods, 
and  is  absolutely  responsible.  This  responsibility 
attaches  to  common  carriers  by  a  rule  of  law,  and  they 
cannot  relieve  themselves  from  it  without  an  express 
contract  to  that  effect. 

3.  Act  of  God.  —  There  are,  however,  some  few  excep- 
tions to  the  general  rule  that  a  carrier  is  absolutely 
responsible  for  the  safety  of  the  goods  which  he  carries. 
One  of  these  instances  is  where  the  loss  is  incurred  by 
an  "act  of  God."  The  phrase  "act  of  God"  is  used  to 
indicate  the  agency  of  some  superior  power,  which  could 
not   have    been    controlled   by  any   means    whatever. 


LIABILITY  OF  COMMON  CARRIER  243 

Suppose  an  earthquake  destroys  a  railroad  train  with 
the  goods  which  are  upon  it,  or  a  landslide  buries  it 
under  its  debris,  or  a  tremendous  storm  causes  a  vessel 
to  sink,  — all  these  are  "acts  of  God,"  because  they  are 
forces  beyond  the  control  of  man. 

If,  however,  a  vessel  runs  upon  a  hidden  rock,  situ- 
ated so  that  the  accident  was  one  impossible  to  be 
avoided,  that  disaster  would  not  be  deemed  to  have 
been  caused  by  an  "act  of  God."  The  distinction  be- 
tween this  case  and  the  previous  ones  is  not  altogether 
obvious  at  first  sight,  but  there  is  a  distinction.  In 
the  one  case  the  accident  was  caused  directly  by  the 
superior  agency.  In  the  other,  while  the  rock  was 
no  doubt  placed  at  that  point  in  the  sea  by  an  agency 
entirely  superior  to  man,  yet  the  vessel  ran  upon  it, 
not  by  reason  of  any  supernatural  agency,  but  by  the 
act  of  those  who  were  steering  it.  Such  a  disaster  is 
known  as  an  inevitable  accident,  that  is,  an  accident 
which  could  not  have  been  averted;  but  it  does  not 
excuse  the  common  carrier  from  his  responsibilities. 
It  is  said  by  some  writers  that  if  such  an  accident 
occurs  in  an  uncharted  sea,  the  disaster  would  be 
deemed  to  have  been  caused  by  the  act  of  God,  but 
otherwise,  if  the  rock  should  have  been  marked  on 
the  map.  This  distinction  is  shadowy  and  illogical. 
It  is  preferable  to  class  such  a  case  as  an  inevitable 
accident. 

4.  Where  the  Carrier  has  also  Been  at  Fault.  —  Even 
though  the  goods  may  have  been  destroyed  by  an  "  act  of 
God,"  if  their  destruction  was  brought  about  in  part 
through  the  negligence  or  unreasonable  delay  of  the 
carrier,  he  is  held  responsible  notwithstanding  the  ex- 
ception.   If,  by  reason  of  his  carelessness,  the  carrier  has 


244  CONTRACTS  OF  COMMON  CARRIERS 

unreasonably  delayed  his  voyage  so  that  he  is  overcome 
by  a  great  storm,  which  he  would  have  entirely  escaped 
had  he  been  on  time,  he  would  probably  not  be  excused, 
even  though  his  vessel  was  wrecked  by  the  fierceness  of 
the  tempest  alone.  In  the  same  way,  if  the  captain  of  a 
vessel,  instead  of  following  the  usual  course  marked  on 
the  chart,  makes  a  deviation  into  an  unknown  sea  and 
there  meets  with  a  loss  on  account  of  an  "act  of  God," 
the  carrier  is  responsible,  because  the  real  cause  of  the 
accident  was  the  deviation  from  the  course. 

5.  Act  of  the  Public  Enemy.  —  Another  exception  is 
where  the  goods  have  been  destroyed  by  an  act  of  the 
public  enemy.  If  the  destruction  of  the  property  has 
been  caused  by  an  act  of  a  hostile  army  invading  the 
country,  the  loss  falls  upon  the  owner  of  the  goods,  and 
the  carrier  is  not  responsible.  During  the  Civil  War 
train-loads  of  goods  passing  from  one  point  to  another 
were  frequently  intercepted  and  destroyed  by  the  armies 
of  both  sides.  In  such  cases  the  carrier  is  not  respon- 
sible. In  the  same  way,  if  mobs  destroy  property  in 
the  hands  of  the  carrier,  he  is  as  fully  excused  as  if 
the   loss  had  been  incurred  by  an  "act  of  God." 

6.  Where  the  Shipper  assumes  the  Responsibility.  — 
Sometimes  the  owner  of  the  goods  does  not  surrender 
them  into  the  entire  custody  of  the  carrier.  He  may 
think  he  knows  more  about  how  to  ship  them  than  the 
officials  of  the  railroad,  and  perhaps  goes  with  the  goods 
in  order  to  see  that  they  shall  not  be  damaged.  In  such 
a  case,  if  they  are  lost  without  any  negligence  on  the 
part  of  the  officials  of  the  railroad,  the  latter  is  not 
responsible.  A  man  who  wished  to  ship  a  wagon  upon 
a  freight  car  insisted  upon  putting  it  on  the  car  himself, 
and,  as  he  thought,  braced  the  wheels  in  such  a  way 


LIABILITY  OF  COMMON  CARRIER  245 

that  it  would  not  roll  off.  The  wagon,  however,  did  roll 
off  in  the  course  of  transportation,  and  was  destroyed. 
The  shipper  tried  to  hold  the  company  responsible  for 
its  value;  but  the  court  said,  inasmuch  as  he  himself 
had  taken  charge  of  the  loading  of  the  vehicle,  and  it 
was  lost  because  of  the  defective  bracing  of  the  wheels, 
he  would  have  to  stand  the  loss  himself. 

7.  When  Goods  are  destroyed  on  Account  of  their  own 
Inherent  Nature.  —  It  would  be  most  unjust  to  hold  the 
common  carrier  responsible  for  the  loss  of  goods  which 
are  shipped  in  such  a  manner  that  they  cannot  possibly 
reach  their  destination  in  safety.  Assume  a  case  where 
fruit  is  shipped  for  a  long  distance,  having  been 
improperly  packed,  and  being  on  the  point  of  decaying 
when  it  starts.  Suppose  that  the  railroad  officials 
are  not  notified  as  to  the  character  of  the  contents  of 
the  box,  and  it  is  shipped  in  an  ordinary  freight  car. 
Of  course,  in  such  a  case  it  is  not  possible  that  the 
fruit  can  reach  its  destination  in  good  condition. 

Whenever  a  loss  thus  occurs  by  reason  of  the  inherent 
nature  of  the  goods  themselves,  and  without  any  neg- 
ligence whatever  on  the  part  of  the  carrier,  the  latter  is 
not  responsible.  The  same  rule  applies  when  cattle 
are  shipped  alive,  and  injure  each  other  by  quarreling 
among  themselves.  When  animals  are  so  shipped,  be- 
ing placed  under  unusual  circumstances  and  in  strange 
surroundings,  they  will  almost  inevitably  fight  with 
each  other  during  the  course  of  the  journey.  If,  on 
account  of  this,  some  of  them  are  killed  or  injured,  the 
carrier  is  not  responsible.  So  much  risk  is  assumed 
by  the  shipper. 

8.  Other  Excuses  for  Non-delivery  of  Goods.  —  We  have 
seen  that  if  goods  have  been  lost  through  an  "act  of 


246  CONTRACTS  OF  COMMON  CARRIERS 

God,"  or  an  act  of  the  public  enemy,  or  on  account  of 
their  inherent  nature,  the  carrier  is  not  responsible  for 
his  failure  to  deliver  them  to  the  consignee.  There 
are  one  or  two  other  instances  in  which  the  common 
carrier  is  also  excused  from  fulfilling  his  contract. 
Suppose  A  steals  a  quantity  of  goods  from  X  and  ships 
them  to  B,  the  common  carrier  making  a  contract  with 
A  that  he  will  deliver  them  safely  to  the  consignee.  If, 
before  the  goods  are  finally  delivered  into  the  possession 
of  B,  X  appears  and  claims  them  by  virtue  of  his  supe- 
rior title,  the  common  carrier  cannot  refuse  to  deliver 
the  goods  to  him  without  subjecting  himself  to  liability 
for  their  conversion.  The  carrier,  therefore,  is  com- 
pelled to  deliver  them  to  X,  and,  consequently,  is 
unable  to  deliver  them  to  the  consignee.  In  such  a 
case  he  is  excused  for  his  failure  to  perform  his  con- 
tract. 

Another  case  in  which  the  carrier  is  excused,  is 
where  the  consignor  has  stopped  the  goods  in  transitu. 
You  will  remember  from  our  discussion  of  this  subject 
under  the  head  of  sales,  that  when  the  consignee  has 
become  insolvent,  the  consignor  has  the  privilege  of 
stopping  the  goods  at  any  time  before  they  reach  the 
end  of  the  journey.  If  he  exercises  his  right,  the  carrier 
is  excused  from  delivering  to  the  consignee.  Lastly, 
if  the  goods,  while  in  course  of  transportation,  have 
been  seized  by  an  officer  under  legal  process,  this 
excuses  the  carrier  from  the  duty  to  deliver. 

9.  Liability  for  Delay;  Negligence.  —  Common  carriers 
are  not  absolutely  bound  to  deliver  goods,  shipped 
through  their  agency,  at  the  exact  time  at  which  they 
agree  to  do  so.  It  is  recognized  by  the  courts  that  for 
trains  to  be  always  on  time  is  an  utter  impossibility. 


LIABILITY  OF  COMMON   CARRIER  247 

A  delay,  therefore,  which  is  not  due  to  any  fault  or 
negligence  on  the  part  of  the  common  carrier  does  not 
subject  him  to  liability;  though  if  it  has  been  caused 
by  his  own  negligence,  he  is  responsible.  If  he  makes 
a  special  contract,  by  which  he  absolutely  binds  him- 
self to  deliver  the  goods  at  a  certain  specified  time, 
then  he  is  bound  to  deliver  them  at  that  time. 

Thus  far  we  have  been  discussing  the  peculiar  lia- 
bility attached  to  the  common  carrier  by  virtue  of  his 
calling.  Before  closing  the  discussion  of  his  liability, 
it  should  be  remarked  that  he  is  always  responsible  for 
his  own  negligence,  as  was  indicated  when  we  were 
discussing  the  "act  of  God,"  the  "act  of  the  public 
enemy,"  etc.  If  in  such  cases  the  carrier  has  been 
negligent,  he  is  still  responsible. 

10.  Contracts  limiting  Liability.  —  It  is  customary,  in 
fact  it  is  almost  universal,  for  railroads  and  other  com- 
mon carriers  to  make  special  contracts  with  persons  who 
ship  goods  through  their  agency.  By  these  -  contracts 
they  provide  that  they  shall  not  be  responsible  beyond 
a  certain  sum,  unless  the  value  of  the  goods  be  declared 
beforehand ;  or  that  they  shall  not  be  liable  at  all,  unless 
a  claim  is  presented  within  a  certain  time  or  in  a  par- 
ticular manner;  and  sometimes  they  attempt  to  make  a 
contract  by  which  they  shall  not  be  liable  under  any 
circumstances  whatever.  You  can  see  at  a  glance  that 
if  all  carriers  insisted  upon  always  making  such  con- 
tracts as  would  absolutely  free  them  from  liability,  the 
public  would  be  forced  to  accept  the  situation,  because 
goods  must  be  shipped.  The  result  would  be  that  no 
common  carrier  would  ever  be  responsible  for  goods 
which  he  lost.  This  would  defeat  the  purpose  of  the 
common  law  rules  fixing  the  liability  of  persons  exercis- 


248  CONTRACTS  OF  COMMON  CARRIERS 

ing  this  public  calling.  Consequently,  the  law  has 
stepped  in  and  has  forbidden  carriers  to  make  contracts 
of  certain  kinds.  Every  one  is  aware  that  express  com- 
panies always  make  contracts  providing  that  they  shall 
not  be  responsible  beyond  fifty  dollars  for  goods  which 
are  shipped  by  them,  unless  the  value  of  the  goods  is 
declared  beforehand.  Such  contracts  the  law  will  sanc- 
tion. They  will  also  allow  the  carrier  to  make  a  con- 
tract providing  that  a  claim  for  damages  must  be 
presented  in  a  certain  manner  and  within  a  reasonable 
time. 

But  the  common  carrier  cannot  make  a  contract 
by  which  its  liability  for  the  negligence  of  its  servants 
is  evaded.  Unfortunately,  there  is  one  state  which 
has  so  far  departed  from  the  just  and  equitable  view 
of  the  common  law  as  to  hold  that  a  carrier  may  stip- 
ulate against  any  liability  for  the  negligence  of  its 
servants.  This  state,  which  stands  alone  in  this  view 
of  the  law,  is  New  York.  In  other  states,  if  an  agree- 
ment is  entered  into  by  which  the  shipper  provides 
that  he  will  not  hold  the  carrier  responsible  for  acci- 
dents occurring  through  the  negligence  of  its  servants, 
this  contract  is  void.  In  some  states,  any  contracts  in 
any  way  limiting  the  liability  of  the  carrier  are  void. 

11.  When  the  Liability  Terminates. —  Having  seen  what 
the  responsibility  of  the  common  carrier  is  while  he  is 
carrying  the  goods,  we  next  ask,  When  does  this  lia- 
bility come  to  an  end?  The  short  answer  to  this  ques- 
tion is,  It  comes  to  an  end  when  the  goods  are  delivered 
to  the  consignee.  The  question  which  is  sometimes 
difficult  to  answer  is,  When  are  they  delivered?  If 
they  are  personally  delivered  to  the  consignee,  then, 
undoubtedly,  the  liability  of  the  carrier  is  at  an  end. 


LIABILITY  OF  COMMON   CARRIER  249 

Suppose  the  goods  arrive  safely  at  the  termination  of 
the  railroad  journey,  and  a  notice  is  sent  to  the  consignee 
that  the  goods  are  there,  subject  to  his  order.  If  the 
notice  is  properly  sent,  and  the  consignee  does  not  come 
to  claim  the  goods  within  a  reasonable  time,  the  liability 
of  the  company  is  at  an  end,  and  it  is  therefore  re- 
sponsible only  for  its  negligence.  Its  liability  is 
the  same  as  that  which  has  been  referred  to  as  that 
of  a  "warehouseman,"  that  is,  the  liability  which  the 
owner  of  a  warehouse  would  be  under  for  goods  de- 
livered to  him  for  safe  keeping.  In  such  cases  the 
carrier  is  responsible  for  the  manner  in  which  he  keeps 
the  goods,  but  he  is  not  responsible  absolutely  for  their 
safe  delivery. 

Sometimes,  when  goods  are  to  be  shipped  over  sev- 
eral different  lines,  the  first  carrier  delivers  them  to 
a  second  carrier,  the  second  carrier  to  a  third,  and  so 
on,  until  they  reach  the  end  of  the  journey.  In  that 
case,  when  one  carrier  has  delivered  the  goods  to  the 
next  connecting  carrier,  his  responsibility  ceases  and 
that  of  the  next  carrier  begins.  There  are,  however, 
a  few  states  in  which  the  first  carrier  is  responsible, 
(unless  there  is  a  special  contract  freeing  him  from 
responsibility),  even  after  he  delivers  the  goods  to 
the  next  carrier  and  until  they  are  finally  delivered  to 
the  consignee. 


CHAPTER  IV 

EIGHTS  OF  THE  COMMON  CARRIER 

1.  Eight  of  Compensation.  —  Having  seen  what  are  the 
duties  and  liabilities  of  the  common  carrier,  we  now  ask 
what  rights  he  has  to  compensate  him  for  all  these 
arduous  obligations.  The  first  right  is  that  of  com- 
pensation for  the  services  which  he  renders  in  carry- 
ing goods.  It  goes  without  saying  that  no  common 
carrier  will  be  forced  to  carry  goods  without  being 
paid  for  it.  He  is  entitled  to  a  reasonable  compen- 
sation, and  he  is  not  obliged  to  carry  goods  unless 
this  compensation  is  given  to  him  before  he  accepts 
them  for  transportation.  As  a  general  thing,  common 
carriers  do  accept  goods  without  payment  in  advance, 
but  they  are  not  required  to  do  so.  With  regard  to 
the  amount  of  compensation,  we  have  already  seen  that 
the  common  carrier  cannot  charge  unreasonable  rates ; 
on  the  other  hand,  it  is  also  true  that  no  law  can  be 
passed  which  unreasonably  lowers  the  price  which  the 
common  carrier  may  charge;  and  he  is  permitted  to 
charge  proportionately  higher  rates  for  short  hauls  than 
he  does  for  long  hauls.  An  act  of  Congress  may  regu- 
late the  rates  to  be  charged  for  through  freight  which 
passes  from  one  state  to  another,  but  no  state  statute 
can  in  any  way  regulate  rates  except  those  which  are 
charged  from  one  point  in  the  state  to  another  point  in 

250 


RIGHTS  OF  THE   COMMON  CARRIER  251 

the  same  state.  This  is  true  because  the  Constitution 
of  the  United  States  prohibits  the  states  from  inter- 
fering with  interstate  commerce. 

2.  Right  of  Lien.  —  Practically,  the  only  extraordi- 
nary remedy  or  privilege  which  the  common  carrier  has, 
as  compensation  for  his  obligations,  is  the  right  of 
"lien."  By  this  it  is  meant  that  if  the  common  carrier 
is  not  paid  in  advance  for  the  carriage  of  the  goods, 
he  may  retain  them  in  his  own  possession  until  he  is 
paid.  This  privilege  attaches  to  any  kind  of  goods 
which  he  carries.  It  is  really  given  to  him  in  order 
to  compensate  him  for  the  rule  that  compels  him  to 
accept  goods  from  all  who  tender  them.  If  he  were 
not  permitted  this  remed}^,  he  would  be  at  the  mercy  of 
persons  whose  goods  he  had  accepted  and  who  did  not 
intend  to  pay  him,  and  against  whom  he  would  perhaps 
have  no  other  redress.  As  soon  as  the  carrier  has  de- 
livered the  goods,  however,  he  has  lost  his  lien,  and 
has  not  thereafter  any  right  over  them.  According  to 
the  rules  of  the  common  law,  a  carrier  has  no  right  to 
sell  goods  which  he  thus  retains  to  pay  him  for  the 
transportation  charges ;  but  in  nearly  all  the  states  in 
this  country  statutes  have  been  passed  which  give  him 
the  right  to  sell  after  a  reasonable  time  has  elapsed. 


SECTION  II 
CARRIERS  OF  PASSENGERS 


CHAPTER  I 

DUTIES  TOWAKD  THE  PUBLIC 

1.  Who  are  Common  Carriers  of  Passengers.  —  We  have 
now  discussed  carriers  of  goods,  their  rights  and  liabili- 
ties. A  second  class  of  common  carriers  are  those  who 
carry  passengers.  The  common  carrier  of  passengers 
holds  himself  out  to  the  public  as  one  who  will  carry- 
all proper  persons  who  pay  the  stipulated  fare,  between 
the  places  for  which  he  has  facilities  for  carriage.  Very 
much  the  same  tests  which  we  applied  to  ascertain  when 
a  carrier  of  goods  was  a  common  carrier,  may  be  applied 
to  ascertain  when  a  carrier  of  passengers  is  a  common 
carrier.  If  he  is  one  who  makes  a  business  of  trans- 
porting human  beings,  and  holds  himself  out  to  the 
public  as  one  who  is  engaged  in  such  business,  he  is  a 
common  carrier.  Omnibus  lines,  street-car  companies, 
stage-coach  companies,  railroad  companies,  ferryboat 
companies,  etc.,  are  common  carriers  of  passengers.  As 
in  the  case  of  carriers  of  goods,  the  carrier  of  passengers 
must  be  one  who  carries  for  hire. 

2.  Who  are  Passengers.  —  All  persons  who  ride  upon 
the  vehicle  of  the  common  carrier,  with  his  consent, 

252 


DUTIES  TOWARD  THE  PUBLIC  253 

are  passengers,  with  the  exception  of  those  who  are 
employed  by  him,  and  are  there  not  in  the  capacity  of 
passengers,  but  as  workmen.  While  it  is  true  that  in 
order  to  be  a  common  carrier  of  passengers  one  must 
be  a  carrier  for  hire,  yet  a  man  may  be  a  passenger, 
although  he  has  paid  no  money  for  transportation.  A 
man  who  travels  upon  a  pass,  or  is  the  guest  of  a  rail- 
road official,  is  a  passenger.  A  trespasser,  however,  is 
not, —  such  as  one  who  steals  a  ride  upon  a  train,  and  is 
there  without  the  consent,  either  expressed  or  implied, 
of  the  railroad  company.  If  a  man  attempts  to  ride  upon 
a  train  by  using  a  ticket  which  he  has  no  right  to  use, 
he  is  not  a  passenger,  and  is  practically  in  the  same 
situation  as  a  trespasser.  An  individual  becomes  a 
passenger  as  soon  as  he  is  accepted  by  the  carrier  for 
transportation.  This  is  usually  at  the  moment  when  he 
boards  the  vehicle.  It  is  sometimes  held,  also,  that  one 
who  is  in  the  station  of  the  carrier  intending  to  board  an 
incoming  train  is  a  passenger,  even  though  he  has  as  yet 
not  stepped  into  the  vehicle. 

3.  To  Accept  all  Proper  Persons  who  Apply.  —  Just  as 
the  carrier  of  goods  is  bound  to  accept  all  proper  goods 
which  are  tendered  him  for  transportation,  so  the  com- 
mon carrier  of  passengers  is  bound  to  accept  as  pas- 
sengers all  proper  persons  who  present  themselves  for 
carriage.  When  we  say  proper  persons,  we  mean  to 
exclude  those  who  travel  for  the  purpose  of  injuring 
the  railroad,  persons  who  are  fleeing  from  justice,  or 
persons  who  are  traveling  for  any  improper  purpose 
whatever.  If  a  man  is  so  intoxicated  that  his  presence 
would  be  obnoxious  to  the  other  passengers,  he  may  be 
refused.  It  should  be  remembered,  also,  that  the  car- 
rier offers  transportation  facilities  only  for  the  purpose 


254  CONTRACTS  OF   COMMON  CARRIERS 

of  carrying  people  from  place  to  place ;  he  is  not,  there- 
fore, obliged  to  accept  any  one  who  travels  for  the  pur- 
pose of  carrying  on  business  while  on  the  train.  If  a 
man  intends  to  sell  papers  or  black  boots,  or  carry  on 
any  kind  of  business  while  on  the  train  or  boat,  the 
carrier  is  not  obliged  to  accept  him  as  a  passenger. 

4.  Duty  not  to  Discriminate.  —  The  common  carrier  of 
passengers  cannot  make  any  improper  discriminations 
in  the  facilities  which  he  offers  to  those  who  apply. 
He  may,  however,  make  reasonable  regulations.  He 
may  set  apart  a  car  or  compartment  exclusively  for  the 
use  of  women,  and  enforce  such  a  regulation.  He  may 
offer  better  facilities  to  people  who  pay  more  money  and 
who  are  going  longer  distances,  or  who  have  different 
kinds  of  tickets,  but  he  may  not  capriciously  discrimi- 
nate between  people  on  account  of  their  race  or  color. 
In  some  states  it  is  contrary  to  law  to  make  negroes 
go  into  a  car  by  themselves ;  in  other  states  this  is  con- 
sidered a  reasonable  regulation,  particularly  if  the  car 
set  apart  for  negroes  is  as  comfortable  as  the  one  set 
apart  for  white  people.  Such  a  regulation  is  consid- 
ered reasonable  in  most  of  the  Southern  states,  where 
negroes  are  much  more  numerous  than  in  the  North, 


CHAPTER  II      4 

LIABILITY  OF   THE   CARRIER   OF   PASSENGERS 

1.  Carrier  of  Passengers  not  an  Insurer.  —  The  common 
carrier  of  passengers  is  not  an  insurer  of  the  safety  of 
the  persons  whom  he  transports  from  place  to  place. 
We  have  seen  that  if  a  common  carrier  accepts  goods, 
and  makes  a  contract  to  carry  them  safely  from  one 
point  to  another,  he  is  absolutely  responsible  for  the 
safe  delivery  of  the  goods.  But  if  the  carrier  accepts 
you  as  a  passenger,  and  agrees  to  transport  you  safely 
from  Chicago  to  New  York,  he  does  not  thereby  abso- 
lutely guarantee  to  set  you  down  safely  at  New  York. 
What  he  does  agree  is,  that  he  will  use  all  possible  care 
to  transport  you  safely,  and  that  if  he  fails  to  use  all 
possible  care,  then  he  will  be  responsible.  In  other 
words,  if  a  common  carrier  has  injured  you  while  you 
are  traveling  as  a  passenger,  it  must  appear  that  he  has 
failed,  in  some  small  particular,  at  least,  to  exercise  due 
care  in  preserving  you  from  danger,  or  else  you  cannot 
hold  him  responsible.  Suppose  a  freshet  has  washed  out 
a  bridge,  and  the  train  which  you  are  on  falls  into  a 
gully,  and  you  are  severely  injured.  If  it  appears  that 
the  train  men  could  not  have  guarded  against  the  acci- 
dent by  any  possible  precaution,  then  j^ou  cannot  recover 
for  your  injuries.  If  it  appears,  however,  that  they 
should  have  ascertained  the  injury  to  the  track,  and 
ought  to  have  guarded  against  the  accident  to  the 
train,  and  could  have  done  so,  you  can  recover. 

255 


256  CONTRACTS  OF  COMMON  CARRIERS 

Not  only  may  you  not  recover  if  it  has  been  proven 
that  the  company  was  not  negligent,  but  you  may  not 
recover  if  you  yourself  have  been  negligent.  If  you 
attempt  to  board  a  moving  train,  no  matter  how  careless 
the  train  men  may  have  been,  you  cannot  recover,  for 
you  have  been  injured  while  doing  something  which 
you  should  not  have  done :  by  your  own  negligence  you 
have  contributed  to  the  accident. 

If  the  carrier  has  failed  to  deliver  you  at  your  des- 
tination at  the  time  agreed  upon,  he  may  be  responsible 
for  any  reasonable  loss  which  you  may  have  sustained, 
provided  the  delay  was  due  to  some  negligence  on  his 
part.  The  officers  are  not  absolutely  bound,  however, 
to  conform  in  every  particular  to  the  time  scheduled, 
for  this  is  recognized  to  be  an  impossibility. 

As  we  shall  see  more  fully  when  we  discuss  the 
subject  of  agency,  the  common  carrier  is  also  responsible 
for  injuries  received  by  the  passengers  through  the 
wrongful  acts  of  its  servants.  Suppose  the  conductor 
of  a  train  wrongfully  puts  you  off,  and  you  are  con- 
sequently injured  or  suffer  some  loss,  you  may  recover 
against  the  company,  provided  the  act  of  the  conductor 
was  done  while  he  was  acting  within  the  scope  of  his 
authority. 

2.  Contracts  limiting  Liability.  —  The  common  carrier 
of  passengers  is  not  allowed  to  make  a  contract  by  which 
he  provides  that  he  shall  not  be  responsible  for  his  own 
negligence.  Such  contracts  are  absolutely  void.  In 
some  states  it  is  provided  that  a  contract  may  be  made 
by  which  a  carrier  shall  not  be  responsible  for  his  negli- 
gence resulting  in  injury  to  gratuitous  passengers,  but 
these  cases  are  rare.  It  is  contrary  to  public  policy  to 
allow  a  carrier  to  provide  against  his  own  negligence, 


LIABILITY   OF  THE   CARRIER  OF  PASSENGERS      257 

because  in  such  a  case  he  would  use  less  diligence  in 
providing  careful  and  competent  servants. 

3.  Liability  for  Baggage.  —  A  common  carrier  is  not 
only  bound  to  receive  as  passengers  all  proper  persons 
who  apply,  but  he  is  also  bound  to  accept  and  carry  a 
reasonable  amount  of  baggage.  The  liability  of  the 
carrier  of  passengers  for  the  safe  carriage  of  the  baggage, 
is  the  same  as  the  liability  of  a  common  carrier  of  goods 
for  the  safe  transportation  of  merchandise.  The  only 
point  of  difficulty,  and  the  only  new  problem  presented 
is  the  question,  What  is  baggage?  As  a  part  of  his 
contract  of  carriage,  for  which  the  payment  of  his 
fare  is  a  consideration,  every  passenger  has  the  right  to 
take  with  him  a  reasonable  amount  of  certain  articles, 
which  properly  come  within  the  term  "baggage."  By 
baggage  is  meant  such  articles  of  wearing  apparel  or 
of  personal  convenience  as  are  usually  carried  by  pas- 
sengers for  use  during  the  journey,  or  while  sojourning 
at  their  destination. 

The  chief  point  of  distinction  between  baggage  and 
other  property  that  might  be  offered  for  carriage,is  that 
baggage  must  consist  of  such  articles  only  as  are  for  the 
personal  use  of  the  traveler.  Other  articles  need  not 
be  accepted  by  the  carrier,  and  if  accepted  when  packed 
in  such  a  way  that  his  servants  cannot  tell  whether 
they  are  baggage  or  not,  he  is  not  liable  as  an  in- 
surer. Thus  clothing,  jewelry  intended  to  be  worn, 
opera  glasses,  guns  intended  to  be  used  for  sporting 
purposes,  etc.,  are  baggage.  But  drummers'  samples, 
money  not  intended  for  personal  use  on  the  journey, 
cloth  for  a  third  person,  quantities  of  jewelry  not  in- 
tended to  be  worn,  etc.,  are  not  baggage.  If  the  pas- 
senger retains  his  baggage  in  his  own  custody  instead 


258  CONTRACTS   OF   COMMON  CARRIERS 

of  delivering  it  up  to  the  carrier,  the  latter  is  not  held 
to  the  responsibility  of  an  insurer. 

If  articles  that  are  not  baggage  are  carried  on  the  per- 
son of  the  passenger,  the  carrier  is  under  no  liability  at 
all.  Thus,  a  passenger  who  carried  twenty  thousand 
dollars'  worth  of  bonds  on  his  person,  and  who  lost  all 
of  them  in  a  wreck,  was  not  allowed  to  recover  any- 
thing at  all  for  the  loss  of  the  bonds.  He  had  not 
intrusted  them  to  the  company  and  they  were,  more- 
over, not  baggage.  In  general,  also,  the  passenger  must 
be  the  owner  of  the  baggage  he  is  carrying,  and  must, 
as  a  rule,  accompany  it.  If,  however,  his  trunk  is  sent 
ahead  by  special  arrangement,  it  is  deemed  to  be  baggage, 
in  spite  of  the  fact  that  the  owner  does  not  accompany 
it.  Finally,  if  the  carrier  accepts  for  carriage  goods 
which  are  known  not  to  be  baggage,  he  will  be  liable 
as  an  insurer,  for  by  so  doing  he  has  made  a  contract 
for  the  transportation  of  those  articles,  which  contract 
contemplates  the  responsibility  of  a  common  carrier. 

4.  When  the  Liability  Terminates.  —  The  liability  of 
the  common  carrier  is,  obviously,  at  an  end  as  soon  as  the 
passenger  has  reached  his  destination,  and  has  alighted 
from  the  train  or  boat  in  which  he  has  been  carried. 
If  the  passenger  leaves  the  vehicle  before  he  reaches  the 
end  of  his  journey,  the  responsibility  of  the  carrier  ter- 
minates at  that  time.  If  he  does  not  leave  of  his  own 
motion,  but  is  put  off  the  train  or  off  the  boat  for 
improper  conduct,  or  refusal  to  pay  his  fare,  or  for 
some  other  legitimate  reason,  the  liability  of  the  carrier 
then  terminates.  As  in  the  case  of  a  carrier  of  goods, 
the  liability  of  one  carrier  terminates  when  he  delivers 
the  passenger  to  a  connecting  carrier  for  transportation 
on  the  next  stage  of  his  journey. 


CHAPTER   III 

RIGHTS  OF  THE   COMMON  CARRIER  OF  PASSENGERS 

1.  Right  of  Compensation.  —  The  carrier  of  passengers 
is  of  course  not  required  to  carry  them  without  com- 
pensation. Inasmuch  as  he  is  bound  to  accept  all 
proper  persons  who  may  apply,  as  long  as  he  has  room 
to  carry  them,  he  is  not  compelled  to  accept  a  passenger 
at  all  for  tranportation  unless  he  has  been  paid  fare  in 
advance.  This  regulation  is  clearly  necessary  in  order 
to  protect  the  carrier  against  the  public,  whose  servant 
he  is. 

2.  Right  to  make  Regulations.  —  The  common  carrier 
of  passengers  has  a  right  to  make  all  needful  and  proper 
regulations  for  the  government  of  those  who  are  under 
his  care.  He  also  has  the  right  to  enforce  these  regu- 
lations and,  if  necessary,  to  call  in  the  officers  of  the 
law  to  assist  him.  Among  such  regulations  is  the  one 
familiar  to  every  one,  requiring  a  person  to  pay  a  higher 
rate  of  fare  in  case  he  fails  to  purchase  a  ticket  before 
entering  the  train.  The  regulation  concerning  the  cars 
in  which  individuals  shall  go,  and  relating  to  the  man- 
agement of  depots  and  stations,  are  regulations  which 
the  common  carrier  has  a  right  to  make  and  enforce. 


259 


PAKT   VI 
AGENCY 

CHAPTER  I 

CLASSES  OF  AGENTS 

1.  Necessity  for  Agents;  Definition.  —  Hitherto  we  have 
been  investigating  the  nature  and  obligations  of  the 
contractual  relation.  We  have  also  discussed  the  man- 
ner in  which  this  relation  may  be  created;  but  in  so 
doing  we  have  considered  only  cases  where  the  contract- 
ing parties  were  themselves  present,  and  either  did  the 
acts  or  said  the  words,  by  virtue  of  which  they  became 
bound.  It  is  obvious  that  a  very  large  part  of  the  busi- 
ness of  this  world  is  carried  on,  not  by  the  parties  who 
themselves  are  most  interested,  but  by  others  who  have 
been  appointed  to  act  for  them.  This  must  necessarily 
be  so  by  reason  of  the  many  duties  devolving  upon  a 
single  individual  who  is  at  the  head  of  a  large  busi- 
ness, and  of  the  fact  that  it  is  often  necessary  for  dif- 
ferent contracts  to  be  made,  and  for  different  interests 
to  be  looked  after,  in  widely  separated  parts  of  the 
earth  at  the  same  time.  These  things  made  the  ap- 
pointment and  use  of  the  agent  a  necessity. 

An  agent  is  he  who  is  appointed  to  do  something  in 
the  place  of  another.     One  thus  appointed  may,  on 

260 


CLASSES  OF  AGENTS  261 

behalf  of  his  employer,  called  his  principal,  do  any  act 
which  he  has  been  authorized  to  do,  binding  the  prin- 
cipal as  fully  as  if  the  latter  himself  had  done  the  act. 
It  is  a  general  rule  that  an  agent  binds  his  principal 
for  acts  which  he  does,  or  agreements  which  he  makes, 
only  while  acting  within  the  scope  of  the  authority 
which  has  been  delegated  to  him  by  his  principal.  It 
then  becomes  important  to  note  the  classes  of  agents, 
the  extent  of  the  authority  of  each  class,  and  the  manner 
in  which  this  authority  may  be  conferred. 

2.  General  and  Special  Agents.  —  Agents  are  usually 
divided  into  two  classes,  general  and  special.  A  gen- 
eral agent  is  one  who  has  received  from  his  principal  a 
general  authority  to  do  certain  acts.  His  authority  is 
not  limited  to  making  one  particular  contract  or  doing 
one  particular  thing  —  he  has  more  or  less  discretion. 
The  general  manager  of  a  business  is  a  general  agent. 
He  has  authority  to  do  any  act  necessary  for  carrying 
on  the  business,  and  his  actions  will  bind  his  principal 
just  as  completely  as  if  the  latter  had  given  him  a  spe- 
cific authority  to  do  each  particular  thing.  Agents  of 
this  class  have  almost  as  much  power  as  the  principal 
himself,  as  long  as  they  are  acting  within  the  general 
field  of  the  business  for  which  they  are  employed. 

A  special  agent  is  one  who  has  received  no  general 
authority  to  do  any  acts,  but  who  has  been  given  special 
authority  to  do  some  specific  thing.  If  one  has  not 
been  appointed  general  manager  of  a  business,  but  has 
been  authorized  to  make  a  particular  contract,  and  at- 
tempts to  make  any  contract  except  that  one,  he  goes 
beyond  his  authority  and  does  not  bind  his  principal. 
If  A  employs  B  as  an  agent  to  purchase  a  particular 
horse  for  him,  B  has  no  power  to  purchase  any  horse 


262  AGENCY 

except  the  one  designated.  If  he  sees  another  which 
lie  thinks  would  suit  his  principal  as  well,  and  pur- 
chases him,  the  bargain  will  not  bind  the  principal,  for 
the  agent  has  gone  beyond  his  authority.  But  if  he 
has  been  appointed  a  general  agent  to  buy  horses,  and 
has  been  directed  to  purchase  a  particular  horse  at  a 
particular  time,  then  if  he  chooses  to  buy  another 
which  he  thinks  would  suit  his  principal  better,  the 
contract  will  bind,  because  he  has  a  general  authority 
to  purchase  horses.  The  instruction  to  purchase  a 
particular  horse  does  not  restrict  the  authority  of  the 
agent,  but  only  expresses  a  preference  on  the  part  of 
the  principal.  A  general  agent  may  do  many  acts 
which  he  is  not  expressly  commanded  to  do  by  his 
principal,  and  these  acts  will  bind;  but  a  special  agent 
must  be  very  careful  not  to  depart  from  the  strict 
letter  of  his  instructions.  Some  authors  object  to  this 
classification,  on  the  ground  that  it  is  illogical;  they 
say  that  the  difference  between  a  general  and  special 
agent  is  not  a  difference  in  their  essential  nature,  but 
merely  of  degree.  This  may  be  true,  but  nevertheless 
it  is  simpler  to  think  of  agents  as  being  divided  into 
these  two  classes,  because  there  is  a  real  distinction  as 
to  the  responsibility  which  each  class  is  under. 


CHAPTER  II 

CREATION  OF  RELATION  OF  PRINCIPAL  AND  AGENT 

1.  Who  may  be  Principal  or  Agent.  —  It  is  a  general 
maxim  of  the  law  that  he  who  may  do  an  act  himself, 
may  do  it  through  the  medium  of  an  agent.  It  fol- 
lows that  he  who  may  not  do  an  act  in  his  own  person, 
may  not  do  it  through  the  agency  of  another.  If  a 
man  is  unable  to  make  a  contract  he  cannot,  of  course, 
become  a  principal  and  designate  an  agent  to  make  it. 
Any  one  who  is  himself  under  a  disability  which  would 
prevent  him  from  contracting,  cannot  appoint  an  agent 
to  act  in  his  stead. 

Infants,  lunatics,  and  married  women  may  contract 
by  agents  to  the  same  extent  that  they  may  contract  in 
their  own  persons,  and  no  further.  The  limitations  of 
the  contracting  power  of  these  persons  we  have  already 
discussed,  and  need  not  dwell  upon  them  again  at  this 
time. 

Practically,  any  one  who  has  any  discretion  at  all 
may  be  an  agent,  the  mere  exercise  of  authority  not 
requiring  the  full  capabilities  of  one  contracting  for 
himself.  Infants,  married  women,  etc.,  may  be  agents 
and  bind  their  principals  to  contracts  which  they  can- 
not make  themselves.  The  principal  is  the  judge  of 
the  discretion  of  his  agent,  and  if  he  falsely  relies  upon 

263 


264  AGENCY 

it,  he  has  no  one  to  blame  but  himself.  It  is  prob- 
able, however,  that  an  idiot  or  one  non  compos  mentis 
would  be  incapable  of  acting  as  agent  because  of  his 
total  lack  of  discretion. 

2.  Delegation  of  Authority.  —  Having  seen  who  may 
be  a  principal  and  who  may  be  an  agent,  the  next  ques- 
tion is,  How  may  the  relation  of  principal  and  agent  be 
created?  When  A  expressly  authorizes  B  to  make  a 
contract  on  his  behalf,  there  can  be  no  question  that  the 
relation  of  principal  and  agent  is  created.  Whenever 
one  man  expressly  delegates  to  another  the  authority  to 
do  some  act  for  him,  the  relation  of  principal  and  agent 
is  thereby  established  between  them.  If  the  authority 
is  to  make  an  ordinary  simple  contract,  the  appointment 
may  be  made  either  orally  or  in  writing,  at  the  option 
of  the  principal.  If,  however,  one  wishes  to  delegate 
to  another  authority  to  make  a  sealed  contract,  he  must 
give  to  the  agent  a  sealed  instrument  called  a  "power 
of  attorney,"  by  which  he  gives  to  him  the  requisite 
authority. 

In  most  cases,  however,  where  one  man  acts  as  the 
agent  of  another,  there  has  been  no  express  delegation 
of  authority.  The  principal  merely  indicates  what  he 
wishes  the  agent  to  do,  and  the  agency  is  created  by  the 
doing  of  those  particular  acts.  Or  it  may  be  that  by  the 
conduct  of  the  parties  the  relation  has  gradually  been 
established.  Perhaps  he  has,  little  by  little,  granted 
authority  to  the  one  who  is  acting  for  him.  Suppose  a 
lawyer  employs  an  office-boy  who  at  first  does  nothing 
but  take  care  of  the  office  and  run  errands ;  he  becomes 
his  agent  for  those  purposes.  Later  on,  as  he  grows 
older  and  becomes  more  capable,  he  is  permitted  to 
transact  more  or  less  business  on  the  part  of  his  princi- 


RELATION  OF  PRINCIPAL  AND  AGENT  265 

pal,  signing  receipts,  or  even  making  contracts,  and 
doing  other  acts  of  a  like  nature.  Thus,  without  any 
express  delegation  of  authority,  the  office-boy  has  be- 
come, perhaps,  a  general  agent  to  do  a  certain  class 
of  acts.  Perhaps  the  most  common  example  of  implied 
agency  (apart  from  such  situations  as  this  where  clerks, 
office-boys,  etc.,  are  impliedly  made  agents)  are  cases 
where  men  have  allowed  their  wives  habitually  to  con- 
tract for  them,  or  have  continually  sent  their  children 
or  servants  to  do  acts  which  involve  the  power  of 
agents.  In  this  way  the  wife  or  servant  or  child  be- 
comes the  agent  to  do  the  acts  which  they  have  been 
accustomed  to  do,  and  can  bind  the  husband  or  master 
or  father  as  completely  as  if  there  had  been  an  express 
delegation  of  authority. 

3.  Agents  by  Necessity.  —  Sometimes  the  relation  of 
principal  and  agent  may  be  created  without  either  an 
express  or  implied  delegation  of  authority.  This  may 
happen  only  in  unusual  situations  or  under  peculiar 
conditions.  One  partner  is  always  the  agent  for  the 
other  partners,  as  we  shall  learn  when  we  discuss 
the  subject  of  Business  Associations.  Consequently, 
the  mere  creation  of  partnership  relations  constitutes 
each  partner  the  agent  of  all  the  others. 

Again,  if  a  husband  has  gone  away  from  home  with- 
out providing  adequate  means  for  his  wife's  support, 
she,  of  necessity,  becomes  his  agent  so  as  to  be  able  to 
bind  his  estate  for  the  purpose  of  purchasing  the  neces- 
saries of  life  to  supply  herself  and  family.  If  a  sea- 
captain,  navigating  a  vessel,  finds  it  necessary  to  repair 
his  ship  when  he  is  in  a  foreign  port,  he  may  make  a 
contract  which  will  bind  the  owner  of  the  vessel.  If 
this  were  not  the  case  he  would  be  unable  to  repair  the 


266  AGENCY 

ship,  and  the  result  might  be  its  total  loss.    In  all  these 
cases  the  agent  derives  his  authority  from  necessity. 

4.  Ratification  of  Acts  done  by  Unauthorized  Agents.  — 
Sometimes  a  man  who  is  really  not  an  agent  of  another, 
will  do  an  act  upon  his  behalf  and  which  purports  to 
bind  him.  In  such  a  case  the  principal  is  not  bound 
in  any  way.  He  cannot  be  held  responsible  for  the 
act  of  an  individual  to  whom  he  has  given  no  authority 
to  act  for  him.  If,  however,  after  the  act  has  been  done, 
the  principal  approves  it  and  ratifies  it,  then  it  will 
bind  him.  The  situation  is  exactly  the  same  as  if 
the  principal  had  delegated  the  authority  to  the  agent 
before  the  act  was  done. 


CHAPTER  III 

LIABILITY  OF  PRINCIPAL  FOR  ACTS  OF  AGENT 

1.  Liability  for  Contracts.  —  When  an  agent  makes  a 
contract  on  behalf  of  his  principal,  he  binds  not  him- 
self, for  he  is  only  the  instrument,  but  his  principal, 
provided  he  is  acting  within  the  scope  of  his  authority, 
or  if  the  principal  ratines  his  act.  The  most  important 
thing  to  ascertain  in  such  cases  is  whether  the  agent 
has  acted  within  the  scope  of  his  authority.  In  order 
to  determine  that,  it  is  necessary  to  know  the  exact  ex- 
tent of  the  authority  delegated.  Here  the  importance 
of  distinguishing  between  the  general  and  special  agent 
is  obvious.  One  who  has  been  delegated  to  do  a  single 
act  can  bind  his  principal  for  nothing  else.  But  if  an 
agent  has  been  delegated  to  do  a  certain  class  of  acts, 
and  has  been  accustomed  to  do  those  acts,  and  the 
public  has  come  to  understand  that  he  has  a  general 
authority  for  that  purpose,  it  would  be  unjust  not  to 
permit  him  to  bind  his  principal,  as  long  as  he  is  acting 
within  the  general  field  in  which  he  has  power  to  act, 
because  otherwise  the  public  would  be  defrauded. 

If  I  constitute  A  an  agent  to  purchase  for  me  a  certain 
house,  and  A  buys  another  which  he  thinks  as  good  a 
bargain,  the  act  does  not  bind  me.  My  agent  being 
special,  all  persons  dealing  with  him  are  bound  to 
ascertain   the   extent  of  his   authority.      But,  on  the 

267 


268  AGENCY 

other  hand,  suppose  I  am  an  extensive  dealer  in  real 
estate  and  A  has  for  many  years  bought  for  me.  I  tell 
him  to  purchase  a  particular  house,  and  he  oversteps  his 
instructions  to  the  extent  of  purchasing  another  one. 
There  you  see  we  are  in  a  slightly  different  position. 
The  public  knows  that  A  buys  houses  for  me,  there- 
fore the  seller  is  protected,  and  the  bargain  binds  me. 
It  may  be  laid  down  as  a  general  proposition  that  a 
special  agent  cannot  bind  his  principal,  even  though  he 
is  acting  for  him  and  in  the  course  of  his  business, 
unless  he  is  strictly  within  the  letter  of  his  instruc- 
tions. But  a  general  agent,  if  he  is  acting  in  the 
general  scope  of  the  employment  in  which  he  is  ac- 
customed to  act  for  his  master,  binds  him,  even  though 
he  may  not  conform  exactly  to  his  orders.  A  special 
agent  has  no  authority  which  the  principal  has  not  ex- 
pressly conferred ;  a  general  agent  has  all  the  authority 
which  the  acts  of  the  principal  seem  to  confer  upon  him. 
2.  An  Agent  must  always  Act  for  his  Principal.  —  In 
all  cases,  whether  the  agent  be  general  or  special,  the  act 
which  he  does  must  be  for  the  benefit  of  the  principal,  or 
else  it  will  not  bind  the  latter.  By  this  it  is  meant  that 
if  the  agent  does  an  act  entirely  on  his  own  behalf  and 
not  on  account  of  his  principal,  he  cannot  be  acting 
within  the  scope  of  his  authority.  This  is  a  very 
delicate  question  and  sometimes  leads  to  difficulties, 
because  it  often  results  in  the  deception  of  the  public. 
An  attorney  who  had  a  general  authority  to  discount 
all  bills  of  exchange  for  his  principal,  discounted  two 
bills  of  exchange  to  obtain  money  for  his  own  use ;  the 
court  decided  that  inasmuch  as  he  had  done  the  act  for 
his  own  benefit,  and  not  for  the  benefit  of  his  principal, 
it  did  not  bind  the  latter.     The  indorsement,  therefore, 


LIABILITY  OF  PRINCIPAL  FOR  ACTS  OF  AGENT     269 

which  the  agent  placed  upon  the  bill  was  held  not  to 
subject  the  principal  to  any  liability.  This  is  a  very 
doubtful  decision.  From  the  standpoint  of  the  party 
who  discounted  the  bill,  it  made  no  difference  what  the 
secret  intention  of  the  agent  might  have  been.  The 
third  party  would  seem  to  have  had  a  right  to  rely  upon 
the  apparent  authority.  In  most  cases  the  third  party  is 
safe  in  relying  upon  this  apparent  authority,  for  if  the 
principal  has  given  apparent  authority  to  the  agent, 
he  will  not  be  allowed  to  deny  that  he  gave  him  real 
authority. 

3.  The  Public  may  Rely  upon  the  Apparent  Authority  of 
an  Agent.  —  It  is  a  general  rule  of  law  that  a  principal 
is  bound  to  the  extent  of  the  apparent  authority  which 
he  confers  upon  his  agent.  Even  though  he  may  not 
actually  have  intended  to  confer  as  great  an  authority 
as  he  appears  to  have  conferred,  yet  he  is  bound ;  other- 
wise the  public  would  be  deceived.  If  a  principal  dele- 
gates to  another  an  apparent  general  agency,  but  gives 
him  secret  instructions  limiting  his  power,  these  secret 
instructions  will  not  vary  the  rights  of  innocent  parties 
who  have  dealt  with  the  agent. 

A  sent  B  to  the  South  to  buy  cotton  at  a  time  when 
the  armies  of  the  North  and  South  were  engaged  in 
active  hostilities.  A  secretly  instructed  B  to  include 
in  all  contracts  a  stipulation  that  no  cotton  was  to  be 
paid  for  until  it  was  landed  at  St.  Louis.  B  purchased 
cotton  in  the  usual  way  and  it  was  shipped  on  the  Mis- 
sissippi River.  It  was  destroyed  in  transit.  A  con- 
tended that  there  was  no  contract,  as  B  had  exceeded 
his  instructions.  It  was  decided  that  the  contract 
bound  him.  He  had  given  his  agent  the  apparent 
authority  to  purchase  cotton  in  the  usual  way,  and  he 


270  AGENCY 

could  not  now  be  allowed  to  say  that  he  had  not  given 
him  real  authority. 

4.  Liability  for  Torts ;  Reason  for  Liability.  —  Not  only 
does  the  agent  subject  his  principal  to  liability  for  con- 
tracts which  he  makes  while  acting  for  him  and  within 
his  instructions,  but  he  also  subjects  him  to  liability 
for  all  wrongs  or  torts  which  he  commits  while  he  is 
acting  in  the  general  course  of  his  principal's  employ- 
ment. Suppose  you  are  run  over  by  a  street  car,  by 
reason  of  the  negligence  of  a  conductor.  You  may  sue 
the  street-car  company  and  recover  damages,  not  because 
the  company  did  the  act,  nor  because  it  carelessly 
selected  its  servant,  for  it  very  probably  did  neither; 
but  because  from  time  immemorial  the  act  of  the  agent 
has  been  said  to  be  the  act  of  the  principal,  and  therefore 
the  latter  is  responsible  in  damages  for  it. 

There  is  no  logical  reason  why  a  principal  should  be 
liable  for  his  agent's  wrongful  or  negligent  acts.  The 
origin  of  the  rule  is  historical,  and  not  logical.  In 
ancient  times,  a  servant  or  slave  was  considered  merely 
as  a  thing  or  chattel.  If  the  slave  killed  a  man  or 
injured  him  greatly,  the  slave  would  be  given  up  to 
the  injured  man,  or  to  his  family,  for  vengeance. 
After  a  while,  a  master  who  had  valuable  slaves  would 
seek  to  compromise  a  case  where  such  a  tragedy  had 
happened.  He  would  offer  to  pay  the  amount  of  the 
damage  if  he  might  be  allowed  to  retain  the  offending 
slave.  Probably  from  this  custom  was  deduced  the  rule 
that  whenever  the  slave,  or  in  modern  terms,  the  agent, 
does  an  act,  the  principal,  who  has  replaced  the  master, 
must  pay  for  it. 

5.  How  Far  the  Principal  is  Liable  for  Torts.  —  The 
problem  which  most  concerns  us  to-day  is,  For  what 


LIABILITY  OF  PRINCIPAL  FOR  ACTS  OF  AGENT     271 

torts  is  the  principal  responsible?  The  answer,  in  gen- 
eral terms,  is,  For  all  torts  committed  while  the  agent 
is  about  his  master's  business  —  while  he  is  acting 
within  the  scope  of  his  principal's  employment. 

A,  who  was  the  proprietor  of  a  livery  stable,  ordered 
a  driver,  B,  to  drive  to  the  stable  and  put  up  his  team. 
B  drove  in  exactly  the  opposite  direction  to  deliver  a 
parcel,  intending  afterward  to  go  on  around  to  the 
stable  as  directed.  While  on  the  way  he  ran  over  a 
man  and  badly  injured  him.  The  court  said  that  the 
servant  was  acting  for  the  master  inasmuch  as  ulti- 
mately he  was  going  to  the  stable:  therefore  the  princi- 
pal was  held  liable.  If,  however,  to  use  the  expression 
employed  in  a  case  very  similar  to  the  above,  the  ser- 
vant is  going  off  on  "a  frolic  of  his  own,"  he  will  not 
subject  his  master  to  liability  for  his  torts.  The  tort 
must  be  one  that  was  committed  at  a  time  when  the 
agent  was  acting  for  his  principal  and  within  the  gen- 
eral scope  of  his  authority. 

6.  Principal  not  Liable  for  Malicious  "Wrongs.  —  It  is 
sometimes  very  hard  to  tell  whether  the  agent  is  acting 
for  the  master  or  on  his  own  account.  A  brakeman  on 
a  freight  train  ordered  a  boy,  who  was  stealing  a  ride, 
to  get  off ;  the  boy  refused ;  the  brakeman  undertook  to 
put  him  off,  and,  on  account  of  some  resistance  on  the 
part  of  the  boy,  became  very  angry  and  roughly  threw 
him  off  while  the  train  was  moving.  The  boy's  leg 
was  cut  off,  and  he  sued  the  company  to  recover  dam- 
ages for  the  injury.  It  was  contended  that  the  com- 
pany should  not  be  responsible,  that  the  act  of  the 
brakeman  was  a  willful  act,  as  he  was  not  instructed 
to  throw  boys  off  moving  trains;  but  the  court  de- 
cided that  the  company  was  responsible,  because  the 


272  AGENCY 

brakeman  had  been  ordered  to  put  all  trespassers  off  of 
the  cars.  While  his  act  was  unnecessarily  rough,  it 
was  within  the  general  scope  of  his  orders. 

If,  however,  an  agent  does  an  act  out  of  pure  ma- 
liciousness and  not  to  further  the  interests  of  his  em- 
ployer, then  he  cannot  subject  him  to  liability.  A 
brakeman  requested  a  passenger  who  was  smoking  in 
the  wrong  car  to  leave  it  and  go  into  the  smoking-car. 
The  passenger  refused,  and,  after  angry  words  passed 
between  them,  the  brakeman  struck  the  man  over  the 
head  with  his  lantern  and  severely  injured  him.  The 
court  decided  that  the  company  was  not  responsible, 
for  under  no  view  of  the  case  could  it  have  been  the 
duty  of  the  brakeman  to  hit  passengers  over  the  head 
with  his  lantern.  The  act  which  he  did  was  not  done 
in  the  interest  of  the  company. 

7.  Where  the  Agent  is  Guilty  of  Deceit.  —  There  is  a 
certain  class  of  torts  in  which  it  is  necessary  that  the 
person  charged  shall  have  been  guilty  of  moral  wrong- 
doing. You  will  remember  from  our  discussion  of 
fraud  that  one  is  not  liable  in  deceit  unless  he  has 
either  willfully  or  recklessly  lied.  There  has  been  some 
dispute  as  to  whether  a  principal  can  be  held  liable  in 
deceit  for  a  fraudulent  act  which  has  been  committed  by 
his  agent. 

Some  writers  take  the  view  that  the  principal  is 
held  responsible  for  the  negligent  acts  of  his  agent, 
because  the  principal  constructively  may  be  charged 
with  negligence,  inasmuch  as  he  has  hired  the  servant 
who  has  been  careless.  These  writers  say  that  where 
the  wrong  of  deceit  is  involved  you  cannot  charge  the 
principal,  for,  in  order  for  the  wrong  to  be  complete 
there  must  have  been  some  moral  wrongdoing  on  the 


LIABILITY  OF  PRINCIPAL  FOR  ACTS  OF  AGENT     273 

part  of  the  individual  to  be  charged,  and,  inasmuch 
as  the  fraudulent  act  is  committed  entirely  by  the 
agent,  it  is  impossible  to  impute  his  wrongdoing  to  the 
principal.  You  cannot  say  that  the  principal  has  been 
guilty  of  a  willful  wrong,  consequently  he  is  not 
charged  unless  he  has  actually  had  some  part  in  the 
deceit. 

This  view  is  an  absurdity.  The  principal  is 
chargeable  not  because  he  is  guilty  of  a  wrong,  for  he 
is  not,  but  because,  by  virtue  of  his  relation  to  the 
agent,  he  has  taken  upon  himself  the  liability  for  all 
wrongs  done  by  the  agent  while  acting  within  the 
scope  of  his  authority.  It  is  incorrect  to  say  that 
the  principal  is  constructively  charged  with  the  wrong- 
doing of  his  agent ;  as  a  matter  of  fact,  in  almost  every 
case  the  principal  cannot  in  any  way  be  said  to  be 
morally  responsible  for  the  act  of  his  servant.  The 
real  reason  for  his  liability  is,  that  when  he  engages 
in  business  and  hires  servants  to  work  for  him,  he 
assumes  the  common  law  liability  for  the  acts  of  those 
whom  he  employs.  As  we  have  before  indicated, 
this  liability  is  based  upon  no  logical  reason, —  it  is 
merely  fastened  upon  all  persons  who  choose  to  conduct 
business  under  such  circumstances.  The  principal, 
therefore,  is  responsible  for  all  torts,  irrespective  of 
their  nature,  as  long  as  they  have  been  done  for  his 
benefit  and  within  the  scope  of  the  authority  of  the 
agent.     The  later  decisions  have  adopted  this  view. 

8.  Where  there  are  Sub-contractors.  —  A  question  often 
arises  as  to  who  employs  the  servant  who  has  done  the 
act.  Suppose  you  own  a  lot  of  ground  and  desire  to 
build  a  house.  You  employ  a  contractor  to  erect  the 
building.     He  sublets  the  contract  to  a  builder,  who 


274  AGENCY 

employs  a  painter,  whose  assistant  carelessly  drops  a 
beam  on  the  head  of  a  stranger.  Whose  servant  was 
the  wrongdoer?  The  painter's,  the  builder's,  the  con- 
tractor's, or  yours  ?  A  few  years  ago  you  would  have 
been  held  responsible.  At  the  present  time  you  would 
not  be.  The  man  is  the  servant  of  the  independent 
contractor  who  employed  him.  If  the  painter  was 
such  a  contractor,  then  no  liability  could  exist  beyond 
him. 

9.  Liability  for  Crimes.  —  It  may  seem  very  strange  to 
say  that  one  man  could  ever  be  responsible  for  the 
crimes  of  another,  nevertheless  there  are  crimes  which 
may  be  committed  by  the  agent  and  for  which  the  prin- 
cipal is  held  responsible.  Such  crimes  as  murder  and 
robbery  could  never  be  committed  by  the  agent,  while 
acting  within  the  scope  of  the  authority  delegated  to 
him  by  his  master,  unless  the  master  at  the  same  time 
was  really  the  murderer  or  the  robber ;  consequently  the 
consideration  of  such  a  situation  does  not  enter  here. 
In  all  such  cases  the  parties  are  equally  guilty.  But 
there  are  some  crimes  which  may  be  committed  by  the 
agent  while  he  is  acting  within  the  scope  of  the 
authority  delegated  to  him  by  the  principal,  although 
the  principal  did  not  directly  contemplate  them. 

It  is  a  criminal  offence  in  most  states  to  publish  libel- 
ous matter.  The  owner  of  a  newspaper  may  be  crimi- 
nally prosecuted  for  libelous  matter  which  has  been 
published  by  his  agent,  without  his  orders  and  without 
his  knowledge.  In  most  states  there  is  a  special  provi- 
sion that  in  case  libelous  matter  is  published  about  a 
man  who  is  running  for  public  office,  or  any  individual 
whose  reputation  is  properly  before  the  public  for  dis- 
cussion, the  one  responsible  for  the  publication  cannot 


LIABILITY  OF  PRINCIPAL  FOR  ACTS  OF  AGENT     275 

be   held   criminally  liable    unless   his    act   was   done 
maliciously  or  carelessly. 

There  are  a  few  other  situations  where  a  principal 
may  be  responsible  for  the  crime  of  an  agent.  In  many 
states  it  is  a  misdemeanor  to  sell  liquor  to  minors. 
An  owner  of  a  saloon  may  be  responsible  for  the  acts 
of  the  barkeeper  in  selling  to  minors,  although  he  did 
not  give  directions  to  sell  to  them,  and  even  if  he  has 
given  specific  orders  against  it. 


CHAPTER  IV 

LIABILITY  OF  THE  AGENT  FOR  HIS  ACTS 

1.  For  Torts.  —  An  agent  is  always  responsible  for  the 
torts  which  he  commits.  We  have  learned  that  the 
principal  also  is  responsible,  but  this  does  not  relieve 
the  agent  from  responsibility.  As  a  matter  of  fact,  the 
one  who  is  sued  in  nearly  all  cases  is  the  principal,  for 
the  practical  reason  that  the  agent  is  not  usually  finan- 
cially responsible.  Nevertheless,  sometimes  an  agent 
is  almost  as  responsible  as  the  principal.  In  such  cases 
it  is  simpler  to  charge  the  agent  directly,  because  then 
it  is  not  necessary  to  enter  into  the  question  as  to 
whether  he  was  acting  within  the  scope  of  his  authority. 
If  the  agent  is  acting  beyond  the  scope  of  his  authority 
the  principal  is  not  liable ;  and  in  such  cases,  therefore, 
the  agent  is  the  only  one  who  can  be  charged. 

2.  For  Unauthorized  Contracts.  —  We  have  explained 
that  an  agent  binds  his  principal  only  for  those  con- 
tracts which  he  makes  while  he  is  acting  within  the 
scope  of  his  authority.  But  if  an  agent  has  made  a 
contract  which  is  beyond  his  authority,  the  principal  is 
not  liable,  because  he  has  never  consented,  either 
directly  or  indirectly,  to  be  bound.  The  only  person 
who  can  be  held  responsible  in  such  a  case  is  the  agent. 
Strictly  speaking,  he  cannot  be  held  responsible  as  a 
party  to  the  contract,  because  he  did  not  purport  to  make 

276 


LIABILITY   OF  THE  AGENT  FOR  HIS  ACTS        277 

the  contract  on  his  own  behalf;  but  he  is  responsible  for 
damages  to  the  third  party,  for  any  loss  which  may  have 
been  incurred  by  reason  of  his  false  representation  that 
he  had  authority  to  make  the  contract  when  he  had  not. 
He  is  responsible,  whether  he  made  the  false  statement 
innocently  or  not. 

3.  Where  the  Principal  is  not  Named ;  Rights  of  the  Third 
Party.  —  It  sometimes  happens  that  an  agent  makes  a 
contract  with  a  third  party  and  does  not  disclose  the 
name  of  the  principal,  or  perhaps  even  conceals  the 
fact  that  he  has  a  principal.  If  he  discloses  the  fact 
that  he  is  an  agent,  but  does  not  name  his  principal, 
the  question  as  to  whether  or  not  you  can  hold  the 
agent  on  the  contract  depends  upon  the  terms  of  the 
agreement.  If  it  clearly  indicates  that  the  agent  con- 
tracts as  agent,  acting  for  a  principal  as  yet  unknown 
to  the  third  party,  then  the  latter  is  giving  credit  to 
the  unknown  principal,  and  if  the  latter  repudiates,  the 
agent  cannot  be  held. 

If,  however,  the  contract  does  not  expressly  state 
that  the  agent  is  an  agent,  but  leaves  it  doubtful 
whether  he  is  contracting  on  his  own  behalf  or  for  some 
unknown  principal,  then  the  third  party  has  the  right 
of  election ;  he  may  charge  which  one  he  prefers,  either 
the  agent  or  the  principal,  but  when  he  has  elected  to 
hold  one  he  cannot  thereafter  hold  the  other. 

It  has  been  suggested  that  to  allow  an  undisclosed 
principal  to  be  brought  into  a  written  contract,  made 
between  an  agent  and  a  third  party,  would  be  to  con- 
flict with  the  well-known  rule  of  law  that  no  oral  evi- 
dence can  be  brought  in  to  vary  a  written  contract. 
This  objection,  however,  is  not  valid.  If  the  agent 
were  allowed  to  free  himself  from  liability  by  bringing 


278  AGENCY 

in  the  principal,  there  would  be  ground  for  this  objec- 
tion, but  the  agent  is  not  permitted  to  do  this.  The 
third  party  may  bring  in  evidence  to  show  who  the 
principal  is,  in  order  to  hold  him  responsible,  but  the 
agent  cannot  in  any  way  lessen  his  own  liability  by  so 
doing.  A  party  may  be  added  to  a  written  instrument 
by  oral  evidence,  but  one  may  not  be  taken  away. 

4.  Rights  of  an  Undisclosed  Principal  against  the  Third 
Party.  —  In  the  case  which  we  have  been  discussing, 
suppose  the  third  party  is  the  one  who  seeks  to  break 
the  contract:  Who  may  hold  him  responsible,  the 
agent  or  the  hitherto  undisclosed  principal?  The 
rule  is,  that  either  may  do  so.  When  he  has  disclosed 
himself,  the  principal  may  come  in  and  sue  the  third 
party,  if  it  does  not  appear  by  the  terms  of  the  contract 
that  the  agent  alone  is  chargeable.  When  he  is  sued 
by  the  principal,  the  third  party  may  urge  any  defence 
against  him  that  he  could  have  set  up  against  the  agent. 

Suppose  A  makes  a  contract  with  B  for  the  purchase  of 
certain  stock ;  A  pays  B  half  of  the  amount  due  under 
the  contract ;  afterwards  C  is  shown  to  be  the  real  prin- 
cipal for  whom  B  was  selling  the  stock.  In  the  mean- 
time, B  has  absconded  without  paying  any  of  the  money 
over  to  C  which  he  received  from  A.  C  sues  A  under 
the  contract  to  recover  the  entire  amount.  C  may 
recover  from  A  only  the  amount  remaining  unpaid.  A 
would  have  had  a  defence  of  part  payment  as  against 
B,  and  he  has  the  same  defence  as  against  C. 


CHAPTER  V 

MUTUAL  DUTIES  OF  PRINCIPAL  AND  AGENT 

1.  Compensation  and  Reimbursement.  —  Every  principal 
owes  to  his  agent  the  duty  to  pay  him  a  reasonable  com- 
pensation for  his  services,  and  the  agent  may  retain 
funds  belonging  to  his  principal  until  he  is  paid.  The 
agent  is  also  entitled  to  be  reimbursed  for  any  expense 
or  injury  he  may  have  suffered  on  behalf  of  his  princi- 
pal, provided  it  was  legitimately  incurred  while  he  was 
acting  within  the  scope  of  his  authority.  A,  while  in 
an  island  of  the  West  Indies  transacting  business  for 
B,  fell  under  the  displeasure  of  one  Christophe,  who 
was  at  that  time  president  of  the  island,  and  was  con- 
demned to  pay  a  fine  of  three  thousand  dollars  or  else 
to  fight  a  duel  to  the  death  with  a  person  designated  by 
the  president.  To  save  his  life  the  agent  paid  the 
money,  and  subsequently  sued  his  principal  to  recover 
the  amount.  It  was  decided  that  he  could  recover. 
The  expense  was  incurred  by  the  agent  while  acting  for 
his  principal,  and  the  latter  was  bound  to  reimburse 
him.  It  may  be  stated  as  a  general  rule,  that  whenever 
an  agent  is  subjected  to  loss  by  reason  of  some  duty 
which  he  has  performed  for  his  principal,  the  latter  is 
bound  to  make  the  loss  good. 

2.  Responsibility  for  Personal  Injuries;  the  Fellow-Ser- 
vant Rule.  —  Although  the    master   is  responsible   for 

279 


280  AGENCY 

injuries  caused  by  third  parties,  if  received  by  his  ser- 
vants while  acting  within  the  scope  of  their  employ- 
ment, he  is  not  responsible  in  damages  to  a  servant  or 
an  agent  for  an  injury  incurred  through  the  negligence 
of  a  co-worker,  technically  known  as  a  fellow-servant. 
The  reason  for  this  is  not  very  satisfactory.  The  rule 
is  justified  by  saying  that  when  a  servant  hires  himself 
to  work  for  a  master,  he  assumes  to  take  upon  himself 
all  the  risk  of  injury  resulting  from  the  nature  of  the 
employment.  It  is  said  that,  inasmuch  as  he  has 
assumed  this  risk,  he  cannot  charge  his  master  for  an 
injury  which  he  suffers  as  a  result  of  it,  and  that  all 
injuries  which  he  receives  on  account  of  the  negligence 
of  fellow-servants,  are  injuries  the  risk  of  which  he  takes 
upon  himself  when  he  enters  into  the  employment  of 
his  master.  This  assumption  is  untrue  in  fact.  An 
employe*  does  not  actually  assume  such  risks,  and 
there  seems  to  be  little  reason  for  implying  such  an 
assumption.  But  however  unsatisfactory  the  reason  of 
the  rule  may  be,  it  exists  in  practically  all  the  states. 

In  some  states  the  word  "  fellow-servant "  is  construed 
to  mean  only  those  who  are  in  the  same  grade  of  employ- 
ment. Two  engineers,  two  conductors,  two  motormen, 
or  two  track-walkers  would  be  fellow-servants,  but  an 
engineer  and  a  conductor,  or  a  track-walker  and  a  brake- 
man,  or  a  motorman  and  a  workman  in  a  machine  shop, 
would  not  be,  even  though  employed  by  the  same  mas- 
ter. In  other  states,  particularly  in  the  state  of  Penn- 
sylvania, practically  all  who  work  for  the  same  master 
are  classed  as  fellow-servants,  so  that  it  is  really  impos- 
sible for  a  workman  who  has  been  injured  through 
the  negligence  of  another  workman  who  receives  his 
wages  from  the  same  source,  ever  to  recover  anything 


MUTUAL  DUTIES  OF  PRINCIPAL  AND  AGENT     281 

on  account  of  his  injury.  Of  late  years  a  movement  has 
begun  to  develop,  the  tendency  of  which  is  to  limit,  and 
perhaps  finally  to  abolish,  the  fellow-servant  rule:  it  is 
to  be  hoped  that  it  will  succeed.  The  man  who  is  thus 
injured  deserves  to  receive  compensation  for  his  injuries 
as  much  as  any  one,  perhaps  more  so.  It  seems  unjust 
to  deny  a  recovery  in  his  case  and  to  permit  it  in  others. 

3.  Absolute  Duties.  —  Although  he  is  not  responsible 
for  injuries  caused  by  his  own  servants  to  each  other, 
there  are  certain  obligations  which  the  master  is  under 
toward  all  of  them.  He  is  bound  to  supply  a  safe  place 
to  work  in,  safe  machinery  to  work  with,  and  compe- 
tent fellow-servants.  By  this  latter  it  is  meant  that 
notoriously  careless  or  incompetent  servants  must  not 
be  employed.  To  do  so  is  negligence  on  the  part  of  the 
master. 

The  principal  must  also  make  suitable  rules  and 
regulations  to  govern  the  actions  of  his  employe's, 
so  as  to  protect  them  from  injury  as  much  as  may  be. 
A,  a  contractor,  employed  B,  an  inexperienced  work- 
man, to  erect  a  scaffold  upon  which  C  was  to  work. 
The  scaffold  was  improperly  constructed,  and,  by  reason 
of  that  fact,  C  fell  and  was  injured.  C  was  allowed  to 
recover,  although  B  was  a  fellow-servant.  A,  by  hiring 
an  inexperienced  workman  to  erect  the  scaffold,  had 
failed  in  his  absolute  duties.  He  himself  was  guilty 
of  negligence. 

In  such  cases,  if  it  appears  that  the  master  has  failed 
in  some  of  these  duties,  he  is  responsible,  even  though 
he  is  not  shown  to  be  actually  negligent ;  his  failure  to 
provide  safeguards  makes  him  responsible  without  any 
imputation  of  carelessness.  Moreover,  even  though  the 
servant  may  have  known  of  the  defective  machinery  with 


282  AGENCY 

which  he  was  working,  this  will  not  prevent  a  recovery, 
although  it  may  be  evidence  of  contributory  negligence 
which  the  jury  may  take  into  consideration.  Where  an 
elevator-boy  was  injured  by  the  fall  of  an  elevator  which 
was  caused  by  a  defective  rope,  the  evidence  showed 
that  he  knew  the  rope  was  in  a  dangerous  condition, 
but,  nevertheless,  he  was  permitted  to  recover. 

4.  Obedience,  Diligence,  and  Skill On  the  other  hand, 

when  an  agent  enters  into  the  employ  of  his  principal, 
and  undertakes  on  his  behalf  the  duties  which  are 
assigned  to  him,  he  must  exercise  diligence  and  skill, 
and  he  must  be  obedient  to  the  orders  which  he  receives. 
If  he  fails  to  obey  his  master  or  if  he  fails  to  use 
his  own  skill,  or  if  he  is  less  careful  than  an  ordi- 
narily prudent  man  under  the  circumstances  would  be, 
he  has  failed  in  his  duty  toward  his  master,  and  may  be 
held  responsible  by  him.  Thus,  to  revert  to  a  previous 
illustration,  if  a  principal  secretly  instructs  his  agent 
to  buy  cotton,  only  on  condition  that  no  payment  is  to 
be  made  unless  the  goods  actually  arrive  at  their  desti- 
nation, —  while  the  acts  of  the  agent  outside  of  his 
instructions  may  bind  the  principal,  yet  they  are  in 
disobedience  to  his  orders,  and  the  agent  may  be 
charged  with  the  resulting  damage. 

5.  Loyalty.  —  The  agent  is  also  bound  to  be  loyal  to 
his  master;  by  this  we  mean  that  he  may  not  secretly 
give  a  part  of  his  time  to  some  other  pursuit,  when 
ostensibly  he  is  working  only  for  his  principal;  and 
more  particularly  do  we  mean  that  he  must  not  enter 
into  the  service  of  some  one  whose  interests  are  antago- 
nistic to  the  interests  of  his  principal. 

Suppose  A  is  the  owner  of  a  house  which  he  desires 
to  rent.     He  employs  B  to  secure  him  a  tenant.    B  sub- 


MUTUAL  DUTIES  OF  PRINCIPAL  AND  AGENT     283 

sequently  meets  X,  who  is  searching  for  a  house  suit- 
able for  him  to  rent  and  occupy.  X  employs  B  to  find  a 
house  for  him.  Without  disclosing  his  double  agency 
to  either  party,  B  conducts  the  negotiations  between  the 
two.  He  is  bound  to  injure  one  or  the  other  of  his  prin- 
cipals. Inasmuch  as  their  interests  are  antagonistic  to 
each  other,  he  cannot  possibly  serve  both.  In  such  a 
case,  had  he  frankly  disclosed  the  situation  to  both 
parties  and  allowed  them  to  come  together,  there  would 
be  no  objection  to  the  transaction.  Otherwise,  he  has 
been  guilty  of  disloyalty  to  one  of  them  and  is  liable  in 
damages.  It  is  also  generally  understood  that  when  a 
servant  is  employed,  he  must  perform  his  duties  himself 
and  not  delegate  them  to  some  one  else.  In  the  absence 
of  an  agreement  that  he  shall  be  allowed  to  do  this,  such 
a  delegation  would  be  disloyalty. 


CHAPTER  VI 

HOW  THE  RELATION  OF   PRINCIPAL  AND    AGENT   MAY 
BE  TERMINATED 

1.  By  Act  of  the  Parties.  —  Having  discussed  the  vari- 
ous rights  and  duties  of  principal  and  agent,  we  now 
ask  how  this  relation  may  be  brought  to  an  end.  The 
simplest  manner,  perhaps,  is  by  revocation  of  authority 
on  the  part  of  the  principal,  or  by  renunciation  on  the 
part  of  the  agent.  The  principal  is  always  at  liberty 
to  dissolve  the  relation  by  merely  notifying  his  agent 
that  he  is  no  longer  to  act  for  him.  This  revocation 
of  authority  is  of  no  binding  effect  until  it  comes  to 
the  knowledge  of  the  agent.  Contracts  which  the 
agent  has  made  in  the  meantime,  therefore,  will  still 
bind  the  principal. 

There  is,  however,  one  kind  of  agency  which  may 
be  mentioned,  where  the  principal  is  not  at  liberty  to 
revoke  the  authority.  If  A  delegates  B  as  his  agent 
to  do  some  act  which  will  result  in  profit  to  B,  and 
in  consideration  of  this  delegation  of  authority  B  pays 
value,  A  is  not  allowed  to  revoke.  In  such  cases  the 
authority  is  said  to  be  irrevocable.  Suppose  A  lends 
one  thousand  dollars  to  B,  and,  as  collateral  security,  B 
gives  to  A  one  hundred  shares  of  stock,  with  a  power 
of  attorney  to  sell  the  stock  in  case  the  debt  is  not 
paid  at  maturity.  In  such  a  case,  B  could  not  revoke 
the  authority  given  by  the  power  of  attorney.  If  he 
did  not  pay  the  debt  at  maturity,  A  could  sell  the  stock 

284 


TERMINATION   OF   RELATION  285 

in  spite  of  any  attempted  revocation  on  the  part  of  B. 
A  renunciation  of  his  agency  by  the  agent  will,  of 
course,  sever  the  relation  as  completely  as  a  revocation 
on  the  part  of  the  principal. 

2.  By  Death.  —  As  it  is  quite  impossible  for  a  dead 
man  to  make  a  contract,  either  personally  or  through  the 
means  of  an  agent,  consequently,  if  the  principal  dies 
the  agency  terminates  at  once.  It  is  not  necessary  for 
the  fact  of  the  principal's  death  to  come  to  the  knowl- 
edge of  the  agent;  the  authority  is  revoked  at  the 
instant  when  the  principal  ceases  to  exist.  Conse- 
quently, if  an  agent  makes  a  contract  with  a  third 
party  before  he  is  aware  of  his  principal's  death,  the 
contract  binds  no  one. 

3.  By  War.  — If  an  agent  and  his  principal  are  upon 
different  sides  in  case  of  a  war  between  two  countries, 
the  breaking  out  of  the  war  will  terminate  the  relation. 
A  was  an  insurance  agent  who  lived  in  the  South  — 
his  company  being  located  in  New  York.  The  break- 
ing out  of  the  War  of  the  Rebellion  interrupted  the 
agency  of  A.  Although  he  had  received  no  formal 
revocation  of  his  authority,  the  contracts  which  he 
made  in  the  meantime  did  not  bind  his  principal. 

4.  Insanity  of  the  Principal.  —  If  a  principal  has 
become  insane,  he  has,  as  we  have  already  learned, 
become  incapable  of  making  a  contract,  and  it  follows 
that  his  agent  can  no  longer  make  contracts  on  his 
behalf,  for  a  man  cannot  do  by  an  agent  what  he  cannot 
do  himself.  It  has  been  decided,  however,  that  the 
authority  of  an  agent  to  make  contracts  is  not  termi- 
nated by  the  insanity  of  the  principal  until  the  knowl- 
edge of  such  insanity  has  been  conveyed  to  the  agent. 


PART  YII 

BUSINESS  ASSOCIATION'S 


SECTION   I 
PARTNERSHIP 


CHAPTER   I 

ESSENTIAL  CHARACTERISTICS  OF  A  PARTNERSHIP 

1.  Nature  of  Business  Associations.  —  Heretofore  we 
have  dealt  only  with  contracts  which  were  made,  or  with 
business  which  was  transacted,  by  single  individuals, 
acting  either  personally  or  by  means  of  an  agent.  We 
now  take  up  the  discussion  of  associations  of  individu- 
als, which  are  formed  for  the  purpose  of  transacting 
business  in  a  manner  more  advantageous  to  the  mem- 
bers of  the  association  than  a  business  conducted  by 
them  individually  would  be.  Men  who  are  engaged  in 
business,  finding  that  it  will  be  mutually  beneficial, 
often  join  their  capital,  experience,  and  labor  with 
each  other,  providing  that  the  profits  of  the  enterprise 
may  be  shared  by  the  members  of  the  association,  either 
equally  or  in  proportion  to  the  capital  or  business  ex- 
perience contributed  by  each.  This  is  the  first  step  in 
the  concentration  of  capital,  energy,  and  talents.  The 
first  form  of  such  business  associations  is  the  partnership. 

286 


CHARACTERISTICS  OF  A  PARTNERSHIP  287 

2.  Who  are  Partners.  —  When  men  have  entered  into 
the  relation  of  partnership,  they  subject  themselves  to 
certain  responsibilities,  not  only  for  their  own  actions 
but  for  the  actions  of  their  partners.  We  cannot  fasten 
this  responsibility  upon  any  individual  until  we  have 
shown  him  to  be  a  partner.  The  first  question,  there- 
fore, to  be  investigated  is,  What  do  we  mean  by  the  word 
"partnership,"  and  when  are  men  partners?  Suppose 
that  A  and  B  each  conduct  a  retail  dry  goods  store  on  a 
certain  street.  They  conclude  to  hire  a  larger  building 
and  carry  on  business  under  one  roof.  Their  expenses 
are  lessened,  the  attractiveness  of  the  store  is  increased, 
competition  is  done  away  with,  and  the  profits  are  pro- 
portionately larger.  Now  suppose  that  A  borrows  a  large 
sum  of  money,  ostensibly  for  purposes  of  the  firm,  but 
without  B's  knowledge,  and  then  quietly  leaves  the 
country.  If  B  is  A's  partner,  he  is  responsible  for  the 
repayment  of  the  money  borrowed;  if  he  is  not  A's  part- 
ner, then  he  is  under  no  such  obligation.  In  the  case 
here  stated,  A  and  B  would  undoubtedly  be  partners. 

3.  No  Agreement  Necessary  to  Create  a  Partnership.  — 
When  we  say  that  individuals  are  partners,  we  do  not 
necessarily  mean  that  they  have  come  together  and  have 
agreed  among  themselves  that  they  shall  be  partners ; 
that  they  have  perhaps  drawn  up  articles  of  agreement 
which  they  have  signed,  and  which  purport  to  create 
a  partnership.  While  some  partnerships  are  so  formed, 
it  is  probable  that  the  majority  are  not  thus  expressly 
created. 

Parties  may  assume  a  partnership  relation  and 
partnership  obligations  without  intending  to  do  it. 
The  law  judges  whether  or  not  they  are  partners  by 
their  actions,  even  more  than  by  their  words.     In  the 


288  BUSINESS  ASSOCIATIONS 

illustration  in  the  preceding  paragraph,  it  is  possible 
that  A  and  B  thought  nothing  about  whether  or  not 
they  were  partners.  They  were  perhaps  not  aware  of 
the  fact  that  joining  their  stocks  and  doing  business 
together  under  one  name  and  in  one  room  would  con- 
stitute them  partners ;  but  such  was  the  fact. 

4.  How  to  Determine  when  a  Partnership  Exists.  —  It  is 
sometimes  very  difficult  to  determine  whether  indi- 
viduals who  are  associated  in  business  together  are  or 
are  not  partners.  If  A  and  B  were  in  business  together, 
and  divided  the  profits  between  them,  either  equally  or 
in  proportion  to  the  capital  which  each  had  contributed 
to  the  business,  it  was  formerly  supposed  that  they  were 
partners,  and  that  it  would  not  be  necessary  to  inves- 
tigate further. 

That  view  of  the  case  has  been  modified  to  some 
extent.  It  is  quite  possible  for  two  individuals  to 
share  profits  without  being  partners.  Suppose  A  lends 
B  ten  thousand  dollars  with  which  to  begin  business, 
and  stipulates  that  instead  of  interest  he  is  to  receive 
annually  two  thirds  of  B's  net  profits.  If  A  has  no 
control  whatever  over  the  business,  and  has  nothing  to 
do  with  the  active  management  of  it,  he  is  not  a  partner 
even  though  he  shares  the  profits.  Employe's  who  re- 
ceive a  share  of  the  profits  of  the  enterprise,  instead  of 
wages,  are  not  partners.  Thus  you  see,  profit-sharing  is 
not  necessarily  conclusive  as  to  whether  two  or  more 
persons  are  partners.  Another  very  important  element 
to  be  considered  is  whether  the  individuals  jointly 
own  the  property  which  is  being  used  in  the  business. 
This,  however,  is  no  more  conclusive  than  is  the  test 
of  profit-sharing.  It  is  evidence,  but  it  does  not  prove 
anything  by  itself. 


CHARACTERISTICS  OF  A  PARTNERSHIP  289 

5.  The  Real  Test  is  Co-proprietorship.  —  The  real  test  as  to 
whether  or  not  individuals  who  are  in  business  together 
are  partners,  is  whether  they  have  a  co-proprietorship  in 
the  business.  By  this  we  mean  whether  each  one  has 
more  or  less  active  control  over  the  management  of  it. 
If  A  lends  B  money,  stipulating  that  he  shall  receive  a 
certain  share  of  the  profits,  we  have  seen  that  so  long  as 
A  has  no  control  over  the  business,  he  is  not  a  partner. 

Suppose  A  had  stipulated  that  no  new  enterprise 
was  to  be  undertaken  without  his  consent,  still  he 
would  not  be  a  partner ;  he  has  a  restraining  influence, 
but  not  an  active  influence  over  the  business.  If,  how- 
ever, he  actively  participates  in  the  management  of  the 
operations  which  are  undertaken,  if  his  advice  is  sought 
and  followed  with  regard  to  the  initiation  of  new  fea- 
tures, and  particularly  if  he  himself  is  so  actively  en- 
gaged as  to  have  the  power  to  inaugurate  the  steps  to  be 
taken  — •  then  he  is  a  partner.  It  may  be  safely  said  that 
if  two  parties  are  in  business  together  and  share  profits 
and  own  property  in  common,  and  each  one  has  some 
control  over  the  business,  they  are  partners.  We 
cannot  well  lay  down  any  rule  more  definite  than  this. 
Some  one  of  these  elements  may  be  present  and  the 
others  absent,  and  individuals  thus  associated  may  not 
be  partners,  —  probably  are  not,  —  but  it  is  impossible  to 
say,  without  knowing  all  the  circumstances  of  each  par- 
ticular case.  Of  all  these  elements  the  most  important 
is  that  of  co-proprietorship. 

6.  Quasi  or  Nominal  Partners.  —  It  often  happens  that 
two  parties  are  doing  business  together  when  there  is 
an  express  agreement  between  them  that  they  are  not 
partners  and  shall  not  be  held  responsible  for  partner- 
ship liabilities.     The  question  might  arise  in  such  a 


290  BUSINESS  ASSOCIATIONS 

case  whether  it  would  be  right  for  the  law  to  deem 
them  to  be  partners  when  they  have  expressly  repudi- 
ated the  relation  as  between  themselves  —  whether, 
indeed,  the  relation  of  partnership  is  not,  after  all,  a 
sort  of  contract  which  the  parties  have  made  between 
themselves,  either  impliedly  or  expressly.  After  they 
have  expressly  stipulated  that  such  a  relation  shall 
not  exist,  ought  the  law  to  fasten  the  responsibility  of 
it  upon  them  ? 

At  the  same  time,  looking  at  the  situation  from  the 
standpoint  of  a  third  person,  who  has  dealt  with  the 
firm  believing  the  individuals  to  be  partners,  we  can 
see  that  it  makes  very  little  difference  to  him  what 
contract  the  different  individuals  may  have  secretly 
made  with  each  other  when  he  has  been  relying  on  the 
apparent  partnership  between  them.  If  a  man  acts  in 
such  a  way  as  to  lead  other  persons  to  believe  that  he  is 
the  partner  of  another  man,  he  cannot  afterwards  escape 
his  responsibilities  toward  those  who  have  been  deceived 
by  his  actions.  If  the  third  person  who  was  dealing 
with  him  knew,  as  a  matter  of  fact,  that  he  was  not  a 
partner,  then,  although  he  may  have  held  himself  out  to 
the  world  as  a  partner,  that  individual  cannot  hold  him 
responsible.  But  it  is  a  general  rule  that  whenever  a 
man  acts  in  such  a  way  as  to  deceive  the  public  into 
believing  him  to  be  a  partner  of  some  one  else,  he  is 
responsible  as  a  partner  to  all  persons  who  have  dealt 
with  him  under  the  belief  that  he  held  this  relation 
to  another.  Such  an  individual  is  a  "quasi"  part- 
ner. This  word  comes  from  the  Latin,  and  means  one 
who  acts  as  if  he  were  a  partner.  Such  a  relation  may 
be  formed  in  perfect  good  faith,  but  nevertheless  the 
responsibility  of  partnership  attaches. 


CHAPTER  II 

PROPERTY  OF  THE  PARTNERSHIP 

1.  Legal  Title  in  the  Partners  Individually.  —  Having 
ascertained  some  of  the  rules  by  which  we  determine 
whether  or  not  individuals  are  partners,  we  now  assume 
that  we  have  a  partnership  which  is  in  the  possession  of 
a  business  and  a  large  amount  of  property,  and  we  ask 
ourselves,  What  is  the  exact  relation  of  the  property  to 
the  partnership?  Who  owns  the  property  and  who 
may  deal  with  it? 

It  is  impossible,  in  an  elementary  work  of  this 
character,  to  go  deeply  into  the  nature  of  a  partner- 
ship, viewed  from  a  theoretical  standpoint.  We  may 
observe,  however,  at  this  point,  that  the  partnership  is 
only  a  collection  of  individuals.  You  cannot  think  of 
a  partnership  without  thinking  at  the  same  time  of  the 
individuals  who  compose  it.  The  partnership  itself  is 
not  distinct  from  its  members.  We  shall  see,  when  we 
begin  to  study  corporations,  that  a  corporation  is  a  legal 
person  and  is  a  thing  that  exists,  at  least  in  contem- 
plation of  law,  entirely  distinct  from  the  persons  who 
compose  it.  But  it  is  not  so  in  the  case  of  a  partner- 
ship. As  we  shall  see,  a  corporation  may  own  property 
in  its  own  name ;  but  it  is  impossible  for  a  partnership 
thus  to  own  property,  because  the  partnership,  as  such, 
has  no  distinct  existence.     It  follows  that  the   legal 

291 


292  BUSINESS  ASSOCIATIONS 

title  to  the  property  owned  by  the  partnership  must  be 
in  one  or  more  of  the  individual  members  of  the  firm. 
Suppose  A,  B,  and  C  are  partners :  A  owns  a  store ;  B 
owns  a  warehouse;  C  owns  horses  and  wagons  and 
stock.  That  property  may  be  all  property  of  the  firm, 
although  the  legal  title  is  in  these  individual  persons. 

2.  Partners  Hold  only  as  Trustees.  —  Assuming  that 
each  partner  legally  owns  that  particular  part  of  the 
property  which  stands  in  his  name,  we  now  inquire  to 
what  extent  he  may  sell  it  or  deal  with  it  irrespective  of 
the  rights  of  his  fellow-partners.  It  is  clear  that  com- 
plete freedom  could  not  be  allowed,  because  the  busi- 
ness of  the  partnership  could  not  be  satisfactorily 
conducted  on  such  a  basis.  It  is  true  that  each  partner 
has  a  legal  title  to  a  portion  of  the  firm  property,  but 
he  holds  it  as  trustee  for  the  partnership.  If  you  are  the 
guardian  of  X,  who  is  a  minor,  and  his  property  is  placed 
in  your  hands,  you  cannot  deal  with  that  property  as  you 
see  fit.  You  cannot  sell  it  for  your  own  benefit.  You  are 
bound  to  deal  with  it  only  for  the  benefit  of  X,  because 
you  are  a  trustee  for  X.  In  the  same  way  the  partner 
who  holds  a  legal  title  to  firm  property,  holds  it  as 
trustee  for  the  firm,  and  must  use  it  for  the  benefit  of 
the  firm. 

A.  Survivorship  of  Legal  Title.  —  If  a  partner  dies,  that 
terminates  the  relation  of  partnership  between  the 
partners.  What  becomes  of  the  legal  title  to  the  prop- 
erty which  was  owned  by  that  partner  and  held  by  him 
as  trustee  for  the  firm  ?  Does  it  go  to  his  personal  rep- 
resentatives so  that  they  may  come  in  and  deal  with  it, 
and  thus  hamper  the  adjustment  of  the  business  of  the 
firm,  or  is  it  disposed  of  in  some  other  way  ?  There  is 
a  peculiar  rule  in  the  common  law  which  applied  origi- 


PROPERTY  OF  THE  PARTNERSHIP       293 

nally  only  to  tenants  who  are  known  as  "joint  ten- 
ants." If  A  and  B  jointly  own  a  farm,  to  use  the 
expression  which  was  employed  to  describe  this  kind  of 
tenancy,  each  one  owns  the  whole  and  each  part  of  the 
land.  This  seems  to  be  an  absurd  statement,  but  it 
means  that  the  rights  of  the  two  jointly  extend  over  the 
whole  property.  That  is,  it  cannot  be  said  that  one 
owns  part  of  the  property  and  the  other  owns  another 
part;  both  own  the  whole.  In  such  a  case,  if  A  should 
die,  the  title  of  the  entire  property  would  remain  with 
B  and  would  not  go  to  A's  heirs.  The  same  rule  has 
been  applied  to  the  case  of  partners.  If  one  partner 
dies,  the  personal  property,  the  legal  title  to  which  he 
held  as  trustee  for  the  firm  and  which  would  otherwise 
have  gone  to  his  personal  representatives,  becomes  the 
property  of  the  other  partners,  so  that  they  may  deal 
with  it  as  they  see  fit  for  the  purpose  of  winding  up 
the  business.  The  title  to  real  property  does  not  sur- 
vive, but  it  may  be  dealt  with  almost  as  if  it  did  by  the 
remaining  partners. 

B.  What  Each  Partner  owns.  —  We  have  seen  that  each 
partner's  claim  to  the  property  to  which  he  happens  to 
have  a  legal  title  is  only  a  claim  as  trustee,  and  is  really 
of  little  benefit  to  him  personally.  A  claim  to  a  share 
in  a  partnership  is,  however,  a  valuable  one.  It  may 
then  be  asked,  In  what  does  this  valuable  property, 
which  each  partner  personally  owns,  actually  consist? 

Suppose  A,  B,  and  C  are  partners,  and  the  firm  owns 
a  large  office  building  worth  five  hundred  thousand 
dollars.  Does  each  partner  have  a  claim  to  one  third 
of  the  building,  so  that  he  can  sell  one  third  of  it  if  he 
chooses  ?  If  he  dies,  will  the  title  to  one  third  of  the 
building  go  to  his  heirs  ? 


294  BUSINESS  ASSOCIATIONS 

We  must  remember  that  the  firm,  as  a  firm,  owes,  no 
doubt,  certain  obligations  to  third  parties.  Perhaps 
the  building  is  heavily  mortgaged  for  a  firm  debt.  Per- 
haps there  are  a  number  of  creditors  to  whom  the  firm 
owes  money.  Perhaps  the  amount  of  liabilities  is  even 
greater  than  the  value  of  the  property.  We  would 
have  to  take  all  these  things  into  account  before  we 
could  even  estimate  the  real  value  of  a  share  in  that 
partnership.  Under  the  last  supposition,  each  part- 
ner's share  in  the  firm  would  be  worth  nothing  at  all. 
It  might  be  perhaps  worth  even  less  than  nothing. 

In  order  to  estimate  the  property  which  each  partner 
owns,  we  must  consider  it  in  this  manner.  Each  part- 
ner has  a  right  to  share  any  money  which  remains  after 
all  the  firm  debts  have  been  paid.  This  is  a  personal 
claim,  and  his  share  in  the  partnership  is  personal 
property.  In  technical  language,  his  right  is  called 
the  right  to  "have  an  accounting,"  that  is,  the  right  to 
have  the  property  sold,  the  money  applied  to  the  pay- 
ment of  the  debts,  and  the  surplus  divided  among  the 
partners.  If  the  property  is  valuable  and  the  debts 
few,  this  claim  is  very  valuable.  If  the  property  is 
small  and  the  debts  large,  the  partner  would  be  very 
glad  indeed  to  relinquish  all  rights  which  he  has  if,  at 
the  same  time,  he  could  be  relieved  from  all  his  liabili- 
ties. If  he  sells  his  share  in  the  partnership,  he  does 
not  transfer  the  firm  property,  or  any  part  of  it,  to  the 
purchaser.  He  sells  only  the  right  to  share  in  the  sur- 
plus after  all  the  debts  have  been  paid  —  he  sells  the 
right  to  an  accounting.  By  such  a  sale  of  his  rights  a 
partner  cannot  introduce  another  member  into  the  firm, 
but  he  does  give  him  the  right  to  share  what  is  left 
after  the  business  has  been  settled  up.    A  new  member 


PROPERTY   OF   THE   PARTNERSHIP  295 

can  be  introduced  into  the  firm  only  by  the  unanimous 
consent  of  all  the  parties. 

C.  To  Whom  the  Partner's  Share  goes  when  he  Dies.  — 
It  has  been  suggested  that  a  partner's  share  in  the  firm 
property  is  personal  property.  Suppose  all  the  property 
which  is  owned  by  a  firm  is  a  large  lot  of  real  estate. 
Suppose  the  firm  is  composed  of  A,  B,  and  C.  A  dies, 
leaving  an  heir,  X,  and  appoints  an  executor,  Y;  the 
question  is,  Does  the  partner's  share  go  to  X,  as  it  will 
do  if  it  is  real  estate,  or  will  it  go  to  Y,  as  it  will  if  it 
is  personal  property  ? 

All  the  property  owned  by  the  firm  was  real  property, 
but  as  soon  as  it  was  purchased  by  the  firm  it  became 
personal  property.  This  is  a  fiction  of  the  law,  invented 
for  the  purpose  of  facilitating  the  transaction  of  busi- 
ness. The  property  is  treated  as  being  personal  prop- 
erty as  long  as  it  is  owned  by  the  firm.  As  soon,  how- 
ever, as  the  firm's  business  is  all  settled  up,  and  the 
fund  is  ready  for  distribution  among  the  surviving 
partners  and  the  representative  of  the  dead  partner,  it 
is  again  treated  as  being  real  property,  and  the  money 
thus  remaining  is  paid  to  the  heir  of  the  deceased 
partner,  and  not  to  his  executor.  That  is  the  rule  in 
this  country.  In  England,  it  is  somewhat  interesting 
to  know,  the  proceeds  of  the  sale  would  go  to  the 
personal  representatives,  because  it  is  treated  as  being 
personal  property  absolutely,  and  not  real  property. 


CHAPTER  III 

LIABILITY  OF   THE  PARTNERS 

1.  General  Nature  of  a  Partner's  Liability.  —  A  partner- 
ship relation  is  one  Avhich  has  long  been  recognized  by 
the  common  law.  The  responsibilities  of  the  partners 
have  therefore  become  well  settled.  The  individuals 
who  enter  into  such  a  relation  are  the  gainers,  in  that 
they  have  succeeded  in  concentrating  their  capital  and 
lessening  their  expenses,  but  they  do  not  escape  any 
of  their  usual  responsibilities  as  traders  by  so  doing. 
Partners  are  under  a  double  liability.  In  the  first  place, 
the  partnership  property  is  fully  liable  to  the  creditors 
of  the  partnership  for  all  obligations  owing  to  them. 
But  if  it  is  not  sufficient  to  pay  the  debts,  the  personal 
property  of  the  various  individual  partners  may  be 
called  upon  for  that  purpose  by  these  creditors  of  the 
firm.  If  one  of  them  is  compelled  to  pay  the  whole 
amount  of  the  firm  debt,  he  may,  by  bill  in  equity, 
compel  the  others  to  share  his  loss. 

2.  Rights  of  Firm  Creditors  when  Finn  is  Solvent.  — 
Judging  the  rights  of  the  creditor  of  the  firm  from  a 
strictly  legal  standpoint,  as  distinguished  from  an  equi- 
table standpoint,  he  has  the  right  at  any  time  to  take  the 
property  of  the  firm,  or  the  property  of  the  individual 
partners,  to  satisfy  his  claims.  As  long  as  the  firm 
is  solvent,  however, — that  is,  as  long  as  the  property 

296 


LIABILITY  OF  THE  PARTNERS  297 

which  it  owns  is  greater  than  the  debts  which  it  owes, 
and  the  firm  creditor  depends  upon  the  firm  property  for 
the  payment  of  the  debts  due  him,  —  his  rights  will  not 
conflict  with  the  rights  of  any  other  creditors.  It  must 
be  remembered,  however,  that  not  only  may  a  man  have 
creditors  who  have  claims  against  him,  by  virtue  of  the 
fact  that  he  is  a  member  of  the  firm,  but  that  he  may 
also  have  creditors  who  have  claims  against  him  per- 
sonally, which  claims  have  nothing  to  do  with  the  part- 
nership. In  such  cases  it  will  readily  be  seen  that 
situations  might  arise  in  which  the  claims  of  these  two 
sets  of  creditors  would  conflict  with  each  other. 

3.  When  the  Firm  is  Insolvent  and  there  is  Firm  Property. 
—  When  a  firm  has  become  insolvent,  that  is,  when  its 
assets  have  sunk  below  its  liabilities  and  the  partners 
have  decided  to  give  up  their  business  and  distribute 
its  property  among  their  creditors,  then  this  conflict 
between  the  different  sets  of  creditors  necessarily  arises, 
and  it  becomes  the  duty  of  a  court  of  equity  to  distrib- 
ute the  assets  among  them  upon  a  proper  basis. 

We  will  suppose  that  A,  B,  and  C  are  partners. 
Their  firm  property  amounts  to  85000.  A  has  no  prop- 
erty except  his  interest  in  the  firm.  B  is  worth  $5000, 
and  C  is  worth  $15,000,  apart  from  their  interest  in  the 
firm  property.  X  is  a  creditor  of  the  firm  to  the  amount 
of  $25, 000.  Y  is  a  creditor  of  A  to  the  amount  of  $2000. 
Z  is  a  creditor  of  B  to  the  amount  of  $5000.  How  shall 
their  claims  be  adjusted? 

X,  the  firm  creditor,  may  take  all  the  firm  property, 
$5000.  That  reduces  his  debt  to  $20,000.  Now  he  may 
take  the  separate  property,  if  there  is  any,  of  A  or  B  or 
C,  or  all  of  them.  He  cannot  go  to  A,  for  A  has  no 
separate  property.     He  could  go  to  B  for  the  amount 


298  BUSINESS  ASSOCIATIONS 

of  the  property  which  he  has,  $5000,  were  it  not  for 
the  fact  that  B  himself  is  insolvent,  in  that  he  owes  Z 
to  the  full  amount  of  his  property.  In  the  particular 
case  which  we  are  discussing,  X  would  go  to  C  and 
take  his  $15,000  worth  of  property  to  satisfy  the  resi- 
due of  his  claim,  $20,000.  Y  would  not  get  anything. 
He  can  get  nothing  from  A's  personal  property,  for  A 
has  none;  he  can  get  nothing  by  reason  of  A's  relation 
to  the  firm,  because  A's  share  in  the  partnership  is  worth 
nothing.  Z,  the  creditor  of  B,  will  get  B's  $5000. 
X,  the  firm  creditor,  will  get  $5000  from  the  firm  and 
$15,000  from  C. 

4.  "  Doctrine  of  Marshalling."  —  This  is  perhaps  all 
plain  enough,  except  the  reason  why  X  cannot  take  B's 
property.  The  reason  he  cannot  depends  upon  the 
peculiar  equitable  doctrine  known  as  the  "  Doctrine  of 
Marshalling."  In  this  illustration,  X,  having  taken 
all  the  firm  property  there  was,  had  the  right  to  go 
to  either  B  or  C.  He  had  two  funds  from  which  he 
could  attempt  to  pay  himself;  Z,  however,  could  not 
take  the  firm  property,  for  his  debt  was  not  a  firm  debt. 
He  could  not  take  property  of  C,  for  he  had  no  claim 
upon  him.  The  only  fund  open  to  him  was  that  which 
belonged  to  B,  and  which  amounted  to  five  thousand 
dollars. 

In  such  a  case,  if  X,  either  because  he  wished  to 
injure  Z,  or  because  he  could  not  get  the  entire  amount 
from  C,  wished  first  to  go  to  B  and  take  all  his  prop- 
erty, equity  would  step  in  and  forbid  him.  The  court 
would  say  to  him,  You  have  two  funds  which  you  can 
take  to  pay  yourself;  Z  has  but  one  fund;  you  cannot 
go  first  to  the  fund  against  which  Z  has  his  claim,  but 
you  must  leave  that  to  him  and  first  draw  upon  the  fund 


LIABILITY   OF   THE   PARTNERS  299 

against  which  there  is  no  other  claim.  This  is  a  fair  way 
of  arranging  the  matter,  otherwise  it  might  be  possible 
for  X  to  have  been  paid  in  full,  whereas  Z  would  get 
nothing  at  all. 

The  foregoing  principles  may  be  stated  as  follows: 
The  firm  creditor  has  a  prior  right  to  take  the  firm's 
estate  for  the  payment  of  his  debt;  the  separate  creditor 
(i.e.,  one  who  has  a  personal  claim  against  a  partner)  has 
a  prior  right  to  take  the  separate  property  of  the  partner 
against  whom  he  has  his  claim,  for  the  payment  of  his 
debt.  If  the  separate  partner  has  any  property  left,  the 
firm  creditor  may  take  that,  but  he  may  not  make  any 
claim  upon  the  separate  property  of  the  partner  until 
all  the  separate  creditors  have  obtained  the  amount  of 
their  debts.  This  is  fair,  because  the  firm  creditor, 
when  he  contracted  with  the  firm,  was  relying  chiefly 
upon  the  credit  of  the  firm  property  and  not  upon  the 
credit  of  the  separate  partners.  At  any  rate,  inasmuch 
as  he  has  the  first  claim  to  the  firm  property,  he  should 
not  also  have  the  first,  or  even  an  equal  claim,  to  the 
separate  property,  but  should  leave  that  to  the  prior 
claim  of  the  separate  creditor. 

5.  When  there  is  no  Firm  Property.  —  The  principles 
which  we  have  just  stated  apply  only  to  cases  where 
there  is  property  belonging  to  the  firm.  If  there  is  no 
property  belonging  to  the  firm,  inasmuch  as  there  is 
nothing  at  all  with  which  to  satisfy  the  claim  of  the 
firm's  creditor  except  the  separate  property  of  the  differ- 
ent partners,  he  is  allowed  to  come  in  equally  with  the 
separate  creditors.  If  a  partner  has  personal  property 
amounting  to  $10,000,  and  a  firm  creditor  and  a  separate 
creditor  each  has  a  claim  of  $10,000,  which  will  get  the 
property?    It  will  be  equally  divided  between  them; 


300  BUSINESS  ASSOCIATIONS 

each  will  receive  $5000.  Again,  as  you  see,  this  is  a 
fair  and  equitable  method  of  arranging  the  claims  be- 
tween the  parties,  for  the  reason  that  otherwise  the 
separate  creditor  would  be  paid  in  full,  whereas  the 
firm  creditor  would  get  nothing. 

6.  When  a  Partner  is  Dead.  —  If  a  partner  dies,  the 
liability  of  his  estate  for  the  payment  of  both  firm  and 
separate  debts  is  precisely  the  same  as  if  he  were  liv- 
ing. As  we  have  already  stated,  the  surviving  partners 
may  use  the  property  to  which  the  dead  partner  held 
the  legal  title  for  the  purpose  of  settling  up  the  ac- 
counts of  the  firm  and  closing  up  the  business.  They 
cannot,  however,  subject  the  estate  of  the  decedent  to 
any  new  obligations,  other  than  such  as  are  absolutely 
necessary  in  order  to  conclude  the  business. 

Suppose  A,  B,  and  C  are  partners ;  C  dies,  and  A  and 
B  give  a  promissory  note  for  a  large  amount  of  money 
to  engage  in  a  new  venture.  They  may  contend  that 
they  did  this  in  order  to  wind  up  the  business,  but 
unless  it  is  conclusively  shown  to  have  been  done  for 
that  purpose  in  good  faith,  the  estate  of  C  would  not 
be  responsible.  The  estate  of  the  dead  man  will  be 
bound  only  by  the  liability  which  he  was  under  at  his 
death. 


CHAPTER  IV 

CONDUCT  OF  THE  BUSINESS 

1.  Power  of  the  Firm  to  Dispose  of  its  Property;  When 
Insolvent.  —  When  we  take  up  the  discussion  of  the 
conduct  of  the  business  of  a  firm,  we  shall  find  that 
there  are  two  things  to  be  considered.  The  first  is,  the 
power  of  the  firm  to  do  certain  acts,  and  the  second, 
whether  or  not  the  persons  signing  the  contract  or 
conducting  the  negotiations  had  the  power  to  act  on 
behalf  of  the  firm.  The  first  question,  which  we  shall 
dispose  of  briefly,  is  as  to  the  power  of  the  firm. 
Assuming  that  the  firm  acts  with  the  consent  of  all 
the  partners,  it  has  the  power  to  dispose  of  the  property 
which  it  owns,  and  to  free  that  property  from  any  re- 
sponsibility for  the  payment  of  the  firm's  debt,  pro- 
vided it  is  solvent  at  the  time  of  the  transaction. 

But  suppose  A,  B,  and  C  are  partners  and  the  firm 
is  hopelessly  insolvent.  Discovering  this  fact,  which 
has  not  as  yet  become  known  to  the  public,  they  decide 
to  sell  off  all  their  remaining  property,  pocket  the 
money,  and  leave  the  country;  which  they  proceed  to 
do.  Suppose  they  have  sold  a  very  valuable  building  to 
X,  for  which  X  has  paid  a  good  price.  The  firm  credit- 
ors, finding  themselves  cheated  out  of  their  money, 
in  trying  to  discover  some  firm  property  with  which 
to  satisfy  their  claims,  find  this  building  and  wish  to 
take  it.     X  objects,  saying  he  is  the  owner  of  it,  as  he 

301 


302  BUSINESS  ASSOCIATIONS 

bought  it  from  the  firm.  The  question  is,  Does  that 
sale  stand?  In  such  a  case  as  this  one  it  would  not. 
A  firm  which  is  insolvent  cannot  transfer  its  property 
so  as  to  defeat  the  claims  of  its  creditors. 

2.  When  Solvent.  —  If,  however,  the  firm  at  the  time 
of  the  sale  of  the  property  was  solvent,  that  is,  if  it 
was  at  that  time  fully  able  to  pay  its  obligations,  the 
sale  is  good.  No  creditor  can  successfully  ask  to  have 
it  set  aside.  It  has  been  thought  that  if  a  firm  sold 
property  at  a  time  when  it  was  actually  insolvent,  but 
when  it  honestly  believed  itself  to  be  solvent,  that  such 
a  sale  would  be  good.  This  view,  however,  is  erroneous, 
since  from  the  standpoint  of  the  creditor  it  makes  no 
difference  whether  the  firm  thought  it  was  solvent  or 
not.  The  one  question  which  can  concern  him  is 
whether  the  firm  was  in  fact  able  to  meet  its  obligations 
at  the  time  the  property  was  disposed  of. 

3.  Each  Partner  the  Agent  of  his  Fellows.  —  We  have 
before  indicated  that  when  several  individuals  enter 
into  the  relation  of  partnership,  each  one  becomes,  to 
some  extent  at  least,  the  agent  of  the  others,  so  that 
if  one  partner  makes  a  contract  or  enters  into  an  obliga- 
tion which  purports  to  bind  the  firm,  this  will  bind  it, 
unless  the  partner  has  done  some  act  which  he  had  no 
authority  to  do.  It  then  becomes  important  to  know 
for  what  purposes  and  to  what  extent  each  partner  is 
the  agent  of  his  fellows.  It  may  be  stated  that  the 
partner  is  a  general  agent,  and  has  power  to  bind  the 
firm  for  all  acts  done  in  the  usual  course  of  the  business 
of  the  firm,  and  that  no  secret  limitations  of  this  gen- 
eral agency  can  affect  the  rights  of  third  parties. 

Each  partner  has  full  authority  to  make  simple  con- 
tracts, which  will  bind  his  fellows.     It  is  understood, 


CONDUCT  OF  THE  BUSINESS  303 

however,  that  these  contracts  shall  be  those  usually- 
made  in  the  course  of  the  business  which  the  firm  is 
doing.  It  can  readily  be  seen  how  impossible  it  would 
be  to  carry  on  the  ordinary  business  of  a  partnership, 
if  it  were  not  permissible  for  each  member  of  it  to 
bind  the  others  for  the  small  business  operations  which 
must  be  conducted  every  day. 

Sometimes  a  question  arises,  when  a  contract  has 
been  signed  by  one  who  has  ceased  to  be  a  partner. 
In  such  a  case,  if  the  notice  that  he  has  withdrawn 
from  the  firm  has  not  been  given  to  the  persons  who 
were  accustomed  to  deal  with  him,  a  contract  which  he 
makes  with  them  will  bind  the  firm  just  as  much  as  if 
he  were  still  a  partner.  With  regard  to  the  question 
of  notice,  actual  notice  must  be  given  to  what  are  known 
as  "prior  dealers,"  that  is,  to  persons  who  have  been 
accustomed  to  deal  with  the  firm  and  with  the  with- 
drawing partner.  As  to  those  who  have  not  been 
accustomed  to  deal  with  the  firm,  a  notice  of  the  with- 
drawal by  publication  is  sufficient  to  protect  the  re- 
maining members  from  responsibility  for  any  contracts 
made  by  the  withdrawing  partner  after  his  withdrawal. 

4.  Sealed  Instruments.  —  Although  a  partner  may  make 
simple  contracts  on  behalf  of  his  firm,  it  is  an  absolute 
rule  that  he  cannot  execute  a  sealed  instrument  unless 
he  has  been  given  special  authority.  You  have  already 
learned  that  an  agent  cannot  execute  a  sealed  instru- 
ment on  behalf  of  his  principal,  unless  his  principal  has 
given  him  the  sealed  authority  to  do  so  by  means  of  an 
instrument  called  a  power  of  attorney.  The  same  rule 
holds  in  the  case  of  a  partnership.  If  A,  B,  and  C 
are  partners,  and  C  is  to  make  a  sealed  contract  on 
behalf  of  the  firm,  A  and  B  must  execute  a  power  of 


304  BUSINESS  ASSOCIATIONS 

attorney  to  him  giving  him  that  authority,  or  his  con- 
tract will  not  bind  the  firm. 

5.  Negotiable  Contracts.  —  When  we  come  to  the  sub- 
ject of  negotiable  contracts  in  this  connection,  it  must 
be  borne  in  mind  that  a  bill  or  note  is  halfway 
between  a  sealed  contract  and  a  simple  contract.  As 
we  have  learned  from  our  discussion  of  negotiable  con- 
tracts, a  bill  of  exchange  or  a  promissory  note  has  a 
certain  value  by  reason  of  its  form,  and  when  it  is  in 
the  hands  of  an  innocent  third  party  it  does  not  need 
to  be  supported  by  a  consideration:  to  that  extent  it 
resembles  a  sealed  contract. 

It  will  be  seen,  therefore,  that  while  a  partner  has 
power  to  execute  negotiable  papers  and  to  bind  his  firm, 
his  power  is  limited.  When  he  is  acting  for  the  benefit 
of  the  firm  and  is  strictly  within  the  scope  of  the  firm 
business,  he  may  bind  his  fellows  by  executing  nego- 
tiable paper.  If,  however,  one  partner  signs  a  prom- 
issory note  purporting  to  bind  the  firm  in  payment  of 
his  individual  debt,  the  presumption  is  that  he  has  no 
authority.  The  separate  creditor  in  such  a  case  cannot 
recover  upon  the  paper,  unless  he  shows  that  he  had 
every  reason  to  believe  that  the  paper  was  given  to  him 
for  a  firm  transaction.  In  the  same  way,  if  a  paper  is 
executed  by  a  partner,  in  the  firm  name,  but  for  his  own 
accommodation,  the  holder  cannot  recover  unless  he 
proves  that  he  was  innocent  when  he  took  it.  Usually, 
the  burden  of  proof  would  be  upon  the  firm  to  show  that 
he  was  not  innocent,  but  here  the  burden  of  proof  is 
shifted.  If  the  paper  is  given  for  a  transaction  which  is 
clearly  in  excess  of  the  authority  of  the  partner,  then  it 
will  not  bind.  If  it  is  not  an  excess,  but  what  is  known 
as  "abuse  "  of  authority,  it  is  said  that  it  will  bind  the 


CONDUCT  OF  THE  BUSINESS  305 

firm  nevertheless.  There  is  no  essential  distinction  be- 
tween these  two  classes  of  cases.  When  the  court  says 
"excess  of  authority,"  it  means  that  the  partner  has 
gone  outside  the  business  of  the  firm;  when  it  says 
"abuse  of  authority,"  it  means  that  he  has  gone  too 
far  in  carrying  out  some  line  which  he  might  legiti- 
mately follow. 

The  only  real  difference  between  the  power  of  a  part- 
ner to  execute  negotiable  paper  and  his  power  to  execute 
simple  contracts,  is  that  in  the  former  case  the  courts 
are  much  more  strict  in  the  interpretation  of  his 
power,  and  call  for  a  greater  exercise  of  good  faith  by 
the  parties  with  whom  he  is  dealing. 

6.  How  the  Partnership  may  be  Dissolved.  —  A  firm  is 
composed  of  a  certain  number  of  individuals.  If  the 
relation  existing  between  them  is  disturbed,  the  part- 
nership is  at  an  end.  If  any  one  of  them  dies,  or 
withdraws  from  the  firm,  this  operates  as  an  instant 
dissolution.  This  withdrawal  may  be  effected  by  a 
sale  of  his  share  in  the  firm  to  some  third  party,  or 
by  his  insolvency,  or  by  his  simple  withdrawal.  It 
will  also  be  brought  about  if  he  becomes  incapacitated 
from  carrying  on  business  because  of  insanity.  It 
goes  without  saying  that  a  firm  may  dissolve  itself  by 
the  mutual  consent  of  the  parties,  and  it  is  almost  as 
obvious  that  the  insolvency  of  the  association  will  bring 
about  the  same  result.  Sometimes,  also,  the  articles  of 
co-partnership,  as  first  drawn  up,  provide  for  the  ter- 
mination of  the  relation  at  a  time  specified.  The 
expiration  of  the  time  would  therefore  dissolve  the  part- 
nership. 


SECTION  II 
CORPORATIONS 


CHAPTER  I 

ESSENTIAL  CHARACTERISTICS  OF  A  CORPORATION 

1.  Distinction  between  a  Corporation  and  a  Partnership. 
—  We  now  take  up  the  second  form  of  business  asso- 
ciation, known  as  a  corporation.  A  corporation  is 
essentially  different  from  a  partnership  in  two  impor- 
tant respects.  The  first  distinction  relates  to  the 
nature  of  a  corporation  itself.  We  have  learned  that 
a  partnership  is  merely  an  association  of  individuals, 
and  that  it  is  impossible  to  consider  the  partnership 
existing  apart  from  the  persons  who  are  its  members. 
We  have  also  seen  that  the  death  of  one  partner  will 
destroy  the  partnership. 

But  what  is  true  of  a  partnership  is  not  true  of  a 
corporation.  The  corporation  has  a  distinct  personal- 
ity of  its  own,  being  a  legal  person  existing  separate 
and  distinct  from  the  members  who  compose  it.  If  you 
are  suing  a  firm  composed  of  A,  B,  and  C,  you  are 
suing  three  persons,  —  A,  B,  and  C,  trading  perhaps  as 
the  firm  of  A,  B,  C  and  Company.  If  a  number  of  in- 
dividuals form  a  corporation,  called  the  Pennsylvania 

306 


CHARACTERISTICS  OF  A  CORPORATION  307 

Railroad,  and  you  sue  that  corporation,  you  do  not  sue 
A,  B,  C,  D,  and  E,  the  members  of  that  corporation, 
but  you  sue  the  Pennsylvania  Railroad.  It  has  an 
existence  which  is  entirely  distinct  from  the  existence 
of  the  individual  members. 

The  second  important  distinction  is  one  which  we 
shall  not  discuss  at  this  point,  but  will  take  up  later, 
namely,  that  the  individual  members  of  a  corporation 
are  not  liable  personally  for  the  debts  contracted  by 
the  corporation,  as  partners  are  liable  for  debts  con- 
tracted by  the  partnership.  When  a  man  purchases 
stock  in  a  corporation,  and  thereby  becomes  a  member 
of  it,  he  risks  only  the  money  which  he  has  invested, 
except  in  cases  where  by  statute  a  greater  liability 
has  been  created. 

2.  Definition.  —  A  great  many  different  definitions 
of  a  corporation  have  been  given.  It  is  not  necessary 
to  perplex  the  student  with  an  enumeration  of  these 
technical  definitions.  Perhaps  the  best  known  is  the 
one  which  was  given  by  Mr.  Chief  Justice  Marshall  in 
the  famous  Dartmouth  College  case,  when  he  said,  "  A 
corporation  is  an  artificial  being,  invisible,  intangible, 
and  existing  only  in  contemplation  of  law."  This 
artificial,  intangible  being,  created  by  individuals  who 
unite  together  according  to  law,  is  endowed  with 
certain  attributes  by  the  government  under  which  it 
is  organized.  Being  not  a  natural  but  an  artificial  per- 
son, it  has  no  power  to  act  until  such  power  has  been 
conferred  upon  it  by  the  sovereignty  which  created  it. 
The  character  and  the  limitations  of  these  powers  we 
will  discuss  later.  What  we  desire  to  emphasize  here 
is,  that  the  corporation  has  a  distinct  existence,  and  is 
what  may  be  called  an  artificial  being. 


308  BUSINESS  ASSOCIATIONS 

3.  How  a  Corporation  is  Created;  its  Attributes.  —  It 
may  be  seen  from  this  brief  discussion  that  there  are 
certain  very  great  advantages  attached  to  the  method 
of  carrying  on  business  by  forming  a  corporation  for 
that  purpose.  The  principal  advantage  is  the  fact 
that  the  individuals  who  thus  invest  their  capital  risk 
nothing  beyond  the  actual  amount  which  they  put  in. 
Moreover,  where  a  great  many  persons  are  interested  in 
the  business,  it  can  be  conducted  much  more  advanta- 
geously by  the  officers  of  a  corporation  than  it  could  be 
by  a  partnership,  where  all  have  more  or  less  power  to 
act.  For  these  reasons,  corporations  are  multiplying 
very  rapidly  all  over  the  country.  It  is  now  quite  a 
usual  thing  for  business  or  manufacturing  companies 
to  become  incorporated. 

In  order  to  establish  a  corporation  it  is  necessary 
only  for  a  certain  number  of  individuals,  usually  five, 
but  sometimes  more  or  less  in  different  states,  according 
to  their  particular  statutes,  to  organize  themselves  as 
an  association,  and  to  apply  for  a  charter  to  the  state  in 
which  they  are  seeking  incorporation.  If  the  purpose 
for  which  they  desire  incorporation  is  a  lawful  one, 
and  one  which  is  sanctioned  by  the  laws  of  the  state 
where  application  is  made,  a  charter,  which  is  a  certifi- 
cate of  incorporation,  will  be  granted.  This  charter, 
or  certificate,  confers  upon  the  invisible,  intangible 
being  created  by  it,  the  attributes  which  are  to  attach 
to  it  and  the  powers  which  it  is  to  exercise.  It 
usually  confers  the  right  to  exist  as  a  corporation ;  the 
right  to  have  a  name,  therein  designated ;  the  right  to 
have  a  corporate  seal,  which  shall  be  attached  to  con- 
tracts; the  right  of  perpetual  succession  (that  is,  the 
privilege  given  to  each  member  of  the  corporation  to 


CHARACTERISTICS  OF  A  CORPORATION  309 

sell  his  interest,  usually  represented  by  a  certificate  of 
stock,  to  some  other  person,  without  in  any  way  affect- 
ing the  existence  of  the  corporation  itself)  ;  and,  finally, 
the  right  to  make  by-laws,  according  to  the  purpose  for 
which  the  charter  is  granted. 

4.  Organization  of  a  Corporation.  —  When  applying  for 
a  charter,  the  applicants  must  state  that  they  have 
organized  themselves  into  a  company  with  the  intention 
of  exercising  the  privileges  to  be  conferred  upon  them 
by  the  charter.  This  association  is  governed  by  officers 
who  are  elected  for  that  purpose.  The  governing  board 
is  usually  composed  of  officers  called  directors ;  in  addi- 
tion to  the  board  of  directors  there  are  such  officers  as 
president,  secretary,  treasurer,  etc.  The  stockholders 
(who  are  the  persons  forming  the  corporation),  as  such, 
have  no  direct  voice  in  the  management  of  the  busi- 
ness. As  we  shall  see,  they  have  the  right  to  vote 
for  the  officers,  but  their  power  stops  at  that  point. 
Here,  again,  we  see  a  very  essential  distinction  be- 
tween a  corporation  and  a  partnership.  Each  partner 
has  not  only  the  right  to  act  on  his  own  behalf,  but  also 
on  the  part  of  his  fellows.  A  stockholder  of  a  corpo- 
ration has  not  even  the  right  to  act  directly  on  his  own 
behalf.  He  can  do  little  except  indicate  whom  he 
wishes  to  hold  the  offices  to  which  the  power  to  act  is 
attached. 

5.  Power  of  the  Corporation.  —  The  charter  which  con- 
fers corporate  life  upon  the  intangible  being,  also  confers 
upon  it  its  capacity  to  act.  If  the  individuals  who  have 
organized  a  corporation  apply  for  a  charter  for  the  pur- 
pose of  carrying  on  a  manufacturing  business,  the 
charter  confers  upon  the  corporation  the  power  to 
manufacture.     If  they  apply  for  a  charter  for  the  pur- 


310  BUSINESS  ASSOCIATIONS 

pose  of  carrying  on  the  business  of  wholesale  dry  goods 
merchants,  the  corporation  is  given  the  power  to  carry 
on  that  kind  of  business.  If  they  apply  for  a  charter  to 
operate  a  railroad,  the  corporation  may  operate  a  railroad ; 
but  in  no  one  of  these  cases  has  it  the  power  to  make 
any  contract  or  do  any  act  whatever  not  in  the  further- 
ance of  the  purpose  for  which  it  was  organized. 

We  shall  hereafter  deal  with  the  effect  of  a  corpora- 
tion overstepping  the  bounds  laid  down  for  it  in  the 
charter.  The  point  we  desire  to  emphasize  here  is  that 
this  artificial  person  created  by  the  charter  does  not 
have  all  the  power  of  a  natural  person,  but  only  the 
powers  pertaining  to  the  business  for  which  it  has 
been  created,  including  the  power  to  contract,  to  borrow 
money,  and  to  do  any  act  ordinarily  necessary  for  car- 
rying on  the  particular  business  in  which  it  is  engaged. 
If  a  corporation  organized  for  the  purpose  of  operating 
a  railroad,  speculates  in  land  or  engages  in  the  whole- 
sale fruit  business,  it  has  gone  beyond  its  power  and 
has  violated  the  terms  of  its  charter. 

6.  Perpetual  Succession.  —  We  have  briefly  referred  to 
that  attribute  of  a  corporation  which  is  known  as  per- 
petual succession.  When  a  corporation  is  organized, 
those  who  are  members  of  it,  and  who  have  invested  their 
money  for  the  purpose  of  carrying  on  the  business,  are 
said  to  own  the  stock  of  the  corporation.  Carrying 
out  further  the  idea  of  an  artificial  person,  the  corpora- 
tion itself  issues  a  certain  number  of  shares  of  stock ; 
the  individual  members  then  purchase  this  stock,  and 
pay  the  money  into  the  treasury  of  the  corporation. 
The  corporation  then  uses  the  money  in  carrying  on  the 
business.  The  members  holding  the  stock  are  called 
stockholders.      Ownership   of    stock   conveys    certain 


CHARACTERISTICS  OF  A  CORPORATION  311 

rights  and  liabilities,  which  we  will  discuss  in  the 
proper  place.  Among  them  is  the  privilege  of  selling 
the  stock  to  other  persons  if  they  choose  to  do  so.  This 
is  what  is  done  in  the  stock  exchanges  of  all  the  great 
cities  of  the  country,  where  hundreds  of  thousands  of 
dollars'  worth  of  stock  changes  hands  daily.  The  pur- 
chaser becomes  a  member  of  the  corporation,  by  virtue 
of  the  fact  that  he  has  bought  the  stock.  If  a  stock- 
holder dies,  his  personal  representative  becomes  a  mem- 
ber of  the  corporation,  because  the  stock  has  come  to 
him  in  his  capacity  as  a  personal  representative  of  the 
deceased.  This  is  another  particular  in  which  corpo- 
rations differ  completely  from  partnerships. 

7.  Citizenship.  —  Necessarily,  when  shares  of  stock  are 
continually  changing  hands,  members  of  the  corporation 
live  in  different  parts  of  the  country.  Suppose  a  cor- 
poration to  have  been  organized  in  the  state  of  Pennsyl- 
vania. Subsequently  the  stock,  after  having  passed 
through  the  hands  of  different  purchasers,  all  comes 
into  the  hands  of  people  who  live  in  the  states  of  New 
York,  New  Jersey,  and  other  states,  and  none  of  whom 
live  in  Pennsylvania.  The  question  then  might  arise 
as  to  where  the  corporation  is  a  citizen.  Would  it  be 
a  citizen  of  the  state  where  it  was  organized,  or  would  it 
be  a  citizen  of  the  state  where  the  majority  of  its  stock- 
holders live  ?  It  would  be  a  citizen  of  the  state  where 
its  charter  was  granted.  Even  though  every  member  of 
it  may  be  a  resident  and  citizen  of  another  state,  and 
even  of  another  country,  that  does  not  change  the 
citizenship  of  the  artificial  person.  Its  citizenship  is 
fixed  by  its  charter. 

A.  Shares  of  Stock  are  Personal  Property.  —  In  discuss- 
ing partnership,  we  saw  that  each  partner's  share  was 


312  BUSINESS   ASSOCIATIONS 

treated  as  personal  property  as  long  as  the  firm  was 
carrying  on  business,  but  that  it  was  treated  as  real 
property  at  the  death  of  a  partner,  if  the  property 
which  it  represented  was  real  property.  Suppose  a  cor- 
poration is  doing  a  land  business,  and  has  no  property 
except  real  estate.  You  are  the  owner  of  a  large  num- 
ber of  shares  of  stock.  Are  you  the  owner  of  real  estate, 
or  are  you  the  owner  of  personal  property?  If  you 
should  die,  would  your  shares  of  stock  go  to  your  heir, 
or  would  they  go  to  your  personal  representative  ?  They 
would  go  to  your  personal  representative,  as  shares  of 
stock  are  not  real  property,  but  always  personal  prop- 
erty, no  matter  what  may  be  the  character  of  the  prop- 
erty owned  by  the  corporation.  A  share  of  stock  merely 
represents  certain  rights  which  a  stockholder  has.  It 
does  not  represent  a  share  in  any  property  owned  by  the 
corporation  itself. 

8.  How  a  Corporation  may  be  Dissolved.  —  Having  seen 
how  a  corporation  may  be  created,  we  now  ask  how  it 
may  be  destroyed.  There  are  five  ways  in  which  a 
corporation  may  come  to  an  end.  In  the  first  place,  its 
charter  may  have  been  granted  for  a  limited  time,  say 
fifty  years;  at  the  end  of  that  period  the  corporation 
dies  a  natural  death.  Secondly,  the  charter  may  be 
repealed  by  the  legislature  of  the  state  which  granted 
it,  if  the  original  charter  contains  a  clause,  which  most 
modern  charters  do,  providing  that  it  may  be  repealed 
at  any  time.  Thirdly,  the  charter  may  be  surrendered 
voluntarily  by  the  corporation,  with  the  consent  of  the 
state,  or  it  may  be  forfeited  for  some  wrongful  act 
which  has  been  done  by  the  corporation  and  for  which  it 
has  been  called  to  account  by  the  attorney-general  of 
the  state.     This  forfeiture  would  have  to  be  brought 


CHARACTERISTICS  OF  A  CORPORATION  313 

about  by  the  decision  of  a  court.  Lastly,  it  is  generally 
considered  that  if  all  the  members  of  a  corporation  die, 
so  that  there  are  no  stockholders  left,  it  then  ceases  to 
exist.  This  view  of  the  case  is  a  little  hard  to  under- 
stand when  we  remember  that  the  corporation  is  entirely 
distinct  from  its  members,  but  nevertheless  such  is  the 
law. 


CHAPTER  II 

LIABILITY  OF  STOCKHOLDERS  OF  A   CORPORATION 
REGULARLY    ORGANIZED 

1.  Liabilities  of  Subscribers  to  Stock.  —  When  a  man 
purchases  stock  he  thereby  becomes  a  member  of  the 
corporation.  If  he  has  not  purchased  outright,  but  has 
only  agreed  to  subscribe,  he  has  then  made  a  contract 
by  which  he  is  obliged  to  pay  for  the  stock  and  accept 
it  according  to  his  agreement.  Suppose,  however,  that 
at  the  time  he  subscribed  to  the  stock,  the  corporation 
was  not  in  existence.  Suppose  A,  B,  and  C  are  at- 
tempting to  organize  a  corporation  for  the  purpose  of 
carrying  on  a  manufacturing  business.  They  wish  to 
raise  a  sufficient  amount  of  capital  to  start.  In  order 
to  do  so,  it  is  necessary  to  get  a  number  of  moneyed 
men  to  subscribe  to  the  stock  of  the  new  corporation ; 
by  so  doing  they  agree  to  pay  the  par  value  of  the  stock 
into  the  coffers  of  the  artificial  person,  so  that  it  may 
begin  business.     Will  such  a  contract  bind? 

Suppose  A  came  to  you  and  induced  you  to  subscribe 
to  ten  thousand  dollars'  worth  of  stock.  The  corpora- 
tion is  afterwards  organized,  and  you  are  offered  your 
shares  of  stock  and  invited  to  pay  your  money.  You 
have,  however,  reconsidered  your  determination,  and 
refuse  to  do  so.  It  may  be  argued  that  the  corporation 
cannot  force  you  to  pay,  because  at  the  time  you  made 
your  contract  the  corporation  did  not  exist;  therefore, 

314 


LIABILITY  OF  STOCKHOLDERS  315 

there  is  no  binding  contract,  because  you  could  not  have 
made  a  contract  with  a  being  not  then  in  existence. 
This  argument  was  at  one  time  accorded  some  consider- 
ation, but  it  has  now  been  abandoned.  If  you  subscribe 
to  the  stock  of  a  corporation,  and  agree  to  accept  and 
pay  for  it  at  a  particular  time,  you  will  have  to  live  up 
to  your  contract,  even  though  the  corporation  was  not 
in  existence  when  the  agreement  was  made.  Perhaps 
the  best  theory  upon  which  this  view  of  the  case  is 
justified  is,  that  you  have  made  an  offer  to  purchase 
stock,  which  offer  is  to  remain  open  until  a  corporation 
is  organized,  and  you  are  bound  by  your  agreement 
with  the  promoters  not  to  withdraw  it.  As  soon  as  the 
corporation  is  organized,  that  constitutes  an  acceptance 
of  the  offer  which  you  have  made.  You  cannot  after- 
wards retract,  consequently  you  are  bound.  Whether 
we  can  theoretically  justify  the  conclusion  or  not,  it  is 
universally  sound  law  that  such  a  subscription  will  bind. 
2.  Conditional  Subscriptions.  —  Sometimes  a  man  sub- 
scribes to  the  stock  of  a  corporation  only  conditionally. 
A  was  the  owner  of  a  farm,  and  was  very  anxious  to 
have  a  railroad  run  across  it,  as  he  had  a  great  deal  of 
produce  to  ship  to  the  city.  He  subscribed  ten  thou- 
sand dollars  to  the  stock  of  a  certain  railroad,  on  con- 
dition that  a  station  should  be  put  on  the  corner  of  his 
farm,  which  condition  was  agreed  to  by  the  organizers 
of  the  company.  The  railroad  was  built,  but  it  did  not 
come  within  two  miles  of  the  farm  of  the  subscriber, 
and  of  course  no  station  was  erected  on  his  land.  He 
refused  to  accept  and  pay  for  the  stock.  The  question 
was  whether  he  could  be  compelled  to  do  so.  In  most 
states  in  this  country  he  would  not  be  compelled  to 
pay, under  those  circumstances. 


316  BUSINESS  ASSOCIATIONS 

There  is  a  strong  argument  which  could  be  made, 
however,  against  such  a  rule,  by  saying  it  is  a  fraud 
toward  the  other  stockholders  for  a  man  to  subscribe  to 
stock  with  a  secret  condition  attached  to  his  subscription. 
Other  men  would  see  his  name  on  the  subscription 
books,  and  they  might  agree  to  purchase  stock  because 
of  the  additional  security  which  was  offered  by  reason 
of  his  being  one  of  the  promoters.  The  argument  then 
says  that  it  would  not  be  right  to  allow  him  to  withdraw 
on  account  of  the  non-fulfillment  of  the  condition, 
which  did  not  appear  upon  the  subscription  book,  and 
which  was  known  only  to  him  and  the  men  with  whom 
he  had  contracted. 

On  the  other  hand,  it  does  not  seem  fair  to  force  a  man 
to  subscribe  to  stock,  when  his  only  reason  for  subscrib- 
ing in  the  first  place  was  the  hope  of  getting  a  station 
upon  his  land  —  in  which  he  has  been  disappointed. 
If  the  condition  is  of  such  a  nature  that  the  court  thinks 
it  was  intended  to  deceive  the  public,  then,  in  all  states, 
the  subscriber  would  be  compelled  to  pay,  even  if  the 
conditions  were  not  fulfilled.  But  where  the  condition 
is  such  a  one  as  indicated,  the  subscriber  would  be  ex- 
cused from  his  subscription  in  nearly  all  the  states. 
In  Pennsylvania  he  would  probably  have  to  pay,  under 
any  conditions,  but  that  view  of  the  law  is  perhaps 
erroneous.  It  is  certainly  not  approved  in  other  juris- 
dictions. 

3.  Liability  of  Stockholders  limited  to  Capital  Invested 

As  previously  indicated,  the  stockholder  of  a  corpo- 
ration risks  only  the  capital  which  he  invests.  If  he 
pays  ten  thousand  dollars  into  the  coffers  of  the  cor- 
poration, in  return  for  which  he  gets  ten  thousand 
dollars'  worth  of  stock,  he  has  embarked  ten  thousand 


LIABILITY   OF   STOCKHOLDERS  317 

dollars  in  business.  If  the  business  of  the  corporation 
prospers,  he  will,  no  doubt,  receive  dividends  upon  his 
stock,  that  is,  he  will  receive  his  share  of  the  profits. 
If  the  business  of  the  corporation  is  a  disastrous  failure 
he  loses  his  ten  thousand  dollars,  but  the  creditors  can- 
not come  upon  his  property  for  the  payment  of  their 
obligations.  In  that  respect  he  is  in  a  much  better 
situation  than  a  partner.  That  is  the  reason  why  so 
many  enterprises,  both  small  and  large,  prefer  to  become 
incorporated  rather  than  to  risk  the  whole  fortunes  of 
their  members  by  conducting  their  business  on  a  part- 
nership basis. 

4.  Stockholder  Bound  to  pay  for  his  Stock  in  Full.  —  We 
will  now  assume  that  a  corporation  has  been  regularly 
organized  and  is  doing  business,  and  that  A  is  an  origi- 
nal subscriber  to  the  stock.  Suppose  that  the  promoters 
of  the  company  have  had  some  difficulty  in  getting  the 
requisite  amount  of  capital,  —  as  often  happens  when  a 
new  company  is  being  launched,  — and,  in  order  to  gain 
support,  they  have  been  offering  to  sell  stock  at  twenty- 
five  per  cent,  of  its  face  value.  That  is,  although  the 
purchaser  receives  ten  thousand  dollars'  worth  of  stock, 
he  pays  for  it  only  twenty-five  hundred  dollars.  Upon 
this  stock  he  is  entitled  to  receive  dividends  as  if  he  had 
paid  the  full  amount ;  and  upon  the  books  of  the  com- 
pany it  would  appear  that  he  had  paid  the  full  amount, 
and  the  treasury  of  the  corporation  would  appear  to  be 
in  much  better  condition  than  it  really  is. 

In  such  a  case,  suppose  X,  after  an  examination  of 
the  books,  loans  a  large  sum  of  money  to  the  corporation. 
Business  is  bad,  and  the  money  is  not  repaid.  X  investi- 
gates, and  finds  out  that  A,  who  purchased  on  the  terms 
mentioned,  has  never  paid  in  the  full  value  of  his  stock. 


318  BUSINESS  ASSOCIATIONS 

He  may  then  force  him  to  do  so,  in  order  that  the  money 
shall  be  applied  to  the  payment  of  the  debts  of  the  cor- 
poration. 

When  a  man  subscribes  to  the  stock  of  a  company 
which  is  being  organized,  he  agrees  that  the  amount  of 
the  face  value  of  the  stock  which  stands  in  his  name 
shall  be  used  for  the  payment  of  the  liabilities  of  the 
new  company.  No  agreement  which  he  may  have  made 
with  the  corporation  itself  will  excuse  him  from  actually 
paying  that  money  into  the  treasury  for  the  benefit  of 
the  creditors.  He  is  considered  by  the  courts  to  be  in 
the  same  position  as  if  he  held  an  amount  of  money 
equal  to  the  face  value  of  the  stock,  as  trustee  for  the 
benefit  of  creditors  who  have  loaned  money  to  the  cor- 
poration, relying  upon  the  apparent  amount  of  funds  in 
the  treasury.  If  this  particular  creditor  had  loaned 
money  to  the  corporation  before  A  had  subscribed  to  the 
stock,  he  could  not  force  A  to  pay,  because  he  would 
not  be  deceived  under  those  circumstances,  or  in  any 
way  injured  by  A's  secret  contract.  As  long  as  the 
rights  of  creditors  did  not  intervene,  the  contract,  as 
originally  made,  would  stand. 


CHAPTER  III 

LIABILITY  OP  STOCKHOLDERS  OF  AN  IRREGULAR 
CORPORATION 

1.  When  a  Creditor  Seeks  to  hold  Stockholders  as  Partners. 

—  Sometimes  the  individuals  who  have  banded  together 
for  the  purpose  of  forming  a  corporation,  do  not  properly 
conform  to  all  the  legal  requirements.  Some  state  laws 
provide  that  a  corporation  shall  not  come  into  existence 
until  three  fourths  of  the  face  value  of  its  stock  shall 
have  been  paid  into  the  treasury  in  cash.  Suppose  that 
in  a  particular  case  only  one  fourth  of  this  amount  has 
been  paid  in,  but  that  the  corporation  begins  business 
in  spite  of  that  fact.  Under  such  circumstances  the 
corporation  was  never  regularly  formed  at  all.  Accord- 
ing to  the  state  law  it  cannot  come  into  existence  until 
the  stipulated  amount  has  been  paid  in.  Under  such 
conditions,  suppose  you  have  lent  a  large  sum  of  money 
to  this  irregularly  formed  corporation.  You  fail  to 
recover  the  amount  of  your  debt  from  the  corporation, 
because  there  are  not  enough  funds  in  the  treasury. 
You  discover  that  the  corporation  was  never  regularly 
formed,  and  you  seek  to  hold  the  stockholders  person- 
ally responsible  for  the  payment  of  your  claim,  upon 
the  theory  that  as  they  have  been  trading  together,  shar- 
ing profits,  etc.,  and  as  they  have  never  secured  corpo- 
rate immunity  as  stockholders,  for  the  reason  that  no 
corporation  was  ever  formed,  therefore  they  must  be 

319 


320  BUSINESS  ASSOCIATIONS 

partners,  and  you  have  the  right  to  recover  against 
them  as  such. 

2.  De  Facto  Corporations.  —  If  there  really  was  no 
attempt  at  creating  a  corporation  made  in  good  faith, 
then  this  argument  might  be  allowed  by  the  court.  In 
most  cases,  however,  —  certainly  in  the  case  we  have  just 
mentioned,  —  the  attempt  to  form  a  corporation  would 
not  result  in  forming  a  partnership,  but  would  form  what 
is  known  as  a  "de  facto"  corporation.  The  "de  facto" 
corporation  is  an  association  which  has  been  formed  by  a 
group  of  individuals  who  started  out  with  the  intention 
of  forming  a  regular  corporation.  It  must  appear  that 
they  were  honest  in  their  efforts  to  become  incorporated, 
that  there  was  a  valid  law  under  which  they  might  have 
become  incorporated  if  they  had  properly  conformed  to 
it,  and  that  they  have  really  organized  themselves  and 
have  carried  on  business  as  a  corporation.  If  all  these 
elements  combine,  and  we  have  what  is  known  as  a 
"de  facto"  corporation,  then  the  stockholders  cannot 
be  charged  as  partners. 

It  is  said  that  the  failure  to  conform  to  the  law 
injures  no  one  except  the  state.  The  state  makes  cer- 
tain stipulations  which  must  be  conformed  to  before 
the  corporation  is  formed.  If  these  requirements  are 
not  conformed  to,  it  is  the  state  that  is  injured,  and 
therefore  the  state  has  the  right  to  complain  (acting 
through  its  attorney-general),  and  to  take  away  the 
charter  of  the  corporation  if  it  sees  fit.  But  if  some 
third  party  has  dealt  with  the  company,  believing  it 
to  be  a  corporation,  and  relying  upon  its  corporate 
credit  and  not  upon  the  individual  liabilities  of  its 
members,  he  is  not  allowed  to  come  into  court  and  say 
that  he   did  not  deal  with  a  corporation,  but  with  a 


LIABILITY   OF  STOCKHOLDERS  321 

partnership.  As  he  has  made  a  contract  with  a  cor- 
poration, he  cannot  now  pretend  that  he  thought  it  to 
be  a  partnership.  He  is  not  injured  by  the  fact  that 
the  corporation  was  irregularly  formed,  but  by  the  cir- 
cumstance that  the  treasury  was  empty. 

3.  "One  Man"  Companies.  —  It  often  happens  that  a 
man  who  is  carrying  on  a  hazardous  business  desires  to 
have  his  business  incorporated,  for  the  purpose  of  secur- 
ing immunity  from  personal  liability  in  case  his  busi- 
ness turns  out  to  be  disastrous.  A,  in  order  to  conform 
literally  to  the  law,  associated  with  himself  his  wife, 
two  of  his  children,  and  his  brother,  in  order  to  make 
the  necessary  five  persons,  and  then  applied  for  a  charter 
in  the  regular  manner,  and  became  incorporated  for  the 
purpose  of  carrying  on  the  same  business  which  he  for- 
merly carried  on  alone.  This  corporation,  as  you  can 
see,  was  really  formed  of  only  one  individual,  viz.,  A. 
He  was  the  only  one  who  was  the  bona  fide  owner  of 
stock;  he  was  £he  only  one  who  had  anything  to  do  with 
the  business ;  he  himself  probably  filled  all  the  offices. 

The  pretended  corporation  became  insolvent,  and  the 
creditors  sought  to  hold  A  personally  responsible  for 
the  payment  of  their  debts.  A  claimed  immunity  on 
the  ground  that  he  was  only  a  stockholder  in  the  corpo- 
ration. There  has  been  some  conflict  of  authority  as  to 
what  would  be  the  result  reached  in  similar  cases.  It  is 
apparent  that  A  literally  conformed  to  the  requirements 
of  the  statute.  Five  individuals  associated  themselves 
together,  and  formed  a  corporation  according  to  law. 
How,  then,  is  it  possible  to  go  back  of  this  apparently 
regular  corporation  and  charge  A  personally  ?  Ameri- 
can courts  take  the  view  that  the  act  of  legislature, 
when  it  says  five  persons  must  associate  together  to 


322  BUSINESS  ASSOCIATIONS 

form  a  corporation,  means  that  there  must  be  five  bona 
fide  stockholders,  and  that  if  one  man  associates  with 
him  other  members  of  his  family,  or  other  persons  who 
are  not  really  interested,  but  who  join  with  him  only 
for  the  purpose  of  furthering  his  private  ends,  the  act 
has  not  been  conformed  to.  In  this  instance  five  bona 
fide  men  had  not  associated  themselves  together,  but 
one  man  and  four  individuals  who  were  mere  cat's- 
paws,  termed  "straw"  men;  therefore  A  could  be  held 
personally  responsible  for  the  payment  of  the  debts  of 
the  corporation,  as  he  was  in  the  case  given. 


CHAPTER  IV 

RIGHTS  OF  STOCKHOLDERS 

1.  The  Right  to  Vote.  —  One  of  the  essential  distinc- 
tions between  the  corporation  and  the  partnership  is, 
that  while  the  partner  has  an  almost  unlimited  power 
to  control  the  business,  the  stockholder's  power  is  re- 
stricted almost  to  the  right  to  vote.  He  has  certain 
limited  rights  to  restrain  the  management  of  the  busi- 
ness, which  we  will  discuss  in  the  next  paragraph,  but 
the  principal  right  which  he  has  in  respect  to  the  busi- 
ness of  the  corporation,  is  the  right  to  vote. 

Every  stockholder  has  the  right  to  vote,  as  a  neces- 
sary incident  of  his  ownership  of  stock.  This  includes, 
first,  the  right  to  elect  officers,  and,  second,  the  right 
to  vote  for  certain  fundamental  principles  which  are 
thereby  embodied  in  the  constitution  and  by-laws  of 
the  company;  and  sometimes  he  may  assist  in  deciding 
upon  the  general  policy  upon  which  the  business  is  to 
be  conducted.  This  right  to  vote  may  be  delegated  to 
some  one  else  temporarily  if  the  charter  and  by-laws  of 
the  corporation  permit  it.  The  person  to  whom  the 
right  to  vote  is  temporarily  given,  and  who  votes  in- 
stead of  the  stockholder,  is  called  the  "  proxy. " 

This  is  a  very  important  matter,  because  often,  in 
order  to  facilitate  the  business  of  a  great  corporation, 
the  stockholders  will  give  their  votes  to  one  "proxy" 

323 


324  BUSINESS  ASSOCIATIONS 

or  to  a  small  committee  who,  therefore,  have  the  entire 
management  of  the  business  within  their  control.  This 
committee  to  whom  the  entire  voting  power  is  given  is 
called  a  "voting  trust."  It  was  formerly  questioned 
whether  it  was  permissible  for  all  the  voting  power  of 
a  corporation  to  be  given  to  two  or  three  individuals  in 
this  manner.  It  has,  however,  been  decided  that  it  is 
not  illegal,  and  may  be  done  for  a  proper  purpose. 

No  agreement,  however,  which  a  stockholder  may 
make,  in  reference  to  giving  his  power  to  vote  to  a 
proxy,  can  prevent  him  from  withdrawing  that  power 
at  will.  These  "  voting  trusts  "  are  organized  very 
often  when  it  is  particularly  desirable  to  commit  the 
corporation  definitely  to  a  certain  line  of  action.  Par- 
ticularly is  this  true  in  cases  where  a  number  of  cor- 
porations wish  to  combine  in  the  form  of  monopolies, 
or,  as  they  are  called,  trusts.  Almost  the  first  step 
necessary  to  accomplish  this  is  to  get  the  voting  power 
of  all  the  corporations  concerned,  into  the  hands  of  two 
or  three  men,  who  will  then  run  all  the  corporations  in 
the  interests  of  the  trust.  A  voting  trust  formed  for  such 
purposes  as  that  would  probably  be  declared  illegal. 

2.  Rights  with  Respect  to  Management.  —  With  respect 
to  the  actual  management  of  the  business,  the  stock- 
holder has  very  little  to  do.  The  active  management 
is  conducted  by  the  directors,  assisted  by  the  president, 
secretary,  treasurer,  etc.,  who  are  regularly  elected 
officers  of  the  corporation.  If  a  stockholder  has  reason 
to  believe  that  the  directors  are  conducting  the  man- 
agement in  a  manner  detrimental  to  his  interest,  he 
may  have  access  to  the  books  by  obtaining  the  proper 
authority  from  the  court,  provided  he  alleges  his  spe- 
cific reason  for  wishing  to  review  them. 


RIGHTS  OF  STOCKHOLDERS  325 

If  the  directors  are  doing  acts  which  are  beyond  the 
power  of  the  corporation,  a  stockholder  may  file  a  bill 
in  equity  to  restrain  them.  If  he  were  not  allowed 
to  do  this,  the  directors  might  proceed  to  perform  these 
acts  and  subject  the  charter  to  the  liability  of  forfeiture, 
which  would  be  an  irreparable  injury  to  the  stockholder. 

In  the  same  way,  if  the  directors  are  acting  in  a 
fraudulent  manner,  —  for  instance,  if  they  are  paying 
themselves  enormous  salaries  so  as  to  use  up  the  profits 
and  leave  no  dividends  for  the  stockholder,  and  the  lat- 
ter is  unable,  for  some  reason,  to  have  the  directors  put 
out  of  office,  he  may  file  a  bill  in  equity  to  restrain 
them  from  conducting  the  business  in  this  improper 
manner.  The  stockholder  also  has  an  inalienable  right 
to  maintain  the  corporation  for  the  purpose  for  which  it 
was  originally  organized.  Even  if  he  is  of  the  minor- 
ity, if  he  purchases  stock  in  a  corporation  which  is 
doing  the  business  of  running  a  railroad,  and  the 
majority  of  the  members  of  the  corporation  desire  to 
procure  a  new  charter,  and  to  engage  also  in  the  busi- 
ness of  running  steamboats,  he  may  prevent  them  from 
doing  this  by  a  bill  in  equity.  Further  than  this,  the 
stockholder's  rights  are  very  limited,  —  he  has  no 
active  control  over  the  business. 

3.  Eight  to  receive  Dividends.  —  The  principal  benefit 
which  the  stockholder  gets  is  his  right  to  draw  divi- 
dends. The  term  "  dividends  "  is  used  instead  of  prof- 
its. Whenever  the  business  of  the  corporation  has 
resulted  in  a  net  profit  over  and  above  the  running 
expenses,  etc.,  and  this  profit  has  reached  a  sufficient 
size  to  warrant  its  distribution  among  the  various  stock- 
holders, the  company,  through  its  directors,  declares 
a  dividend.     These  officers  ascertain  by  simple  calcula- 


826  BUSINESS  ASSOCIATIONS 

tion  what  percentage  of  the  face  value  of  the  stock  can 
be  paid  out  as  profit  to  all  the  stockholders ;  they  then 
make  a  formal  statement  to  that  effect,  and  pay  divi- 
dends to  all  stockholders,  according  to  the  amount  of 
stock  which  each  holds. 

In  many  corporations  there  are  two  classes  of  stock, 
known  as  common  stock  and  preferred  stock.  If  you 
are  a  holder  of  preferred  stock,  you  are  entitled  to 
receive  a  dividend  up  to  a  certain  percentage,  which  is 
indicated  in  the  certificate  of  stock,  before  the  holders 
of  common  stock  get  any  dividends  at  all.  The  pre- 
ferred stock  is  therefore  apt  to  sell  at  a  higher  figure 
than  the  common  stock. 

Sometimes  the  business  has  been  profitable,  but 
the  directors,  for  some  reason,  do  not  see  fit  to  de- 
clare a  dividend.  If,  in  such  a  case,  the  stockholders 
feel  aggrieved  because  no  dividends  have  been  declared, 
have  they  any  means  of  forcing  the  directors  to  declare 
a  dividend?  In  a  court  of  equity  at  the  present  day,  a 
stockholder  may  file  a  bill  to  force  the  directors  to  de- 
clare a  dividend,  if  it  clearly  appears  that  they  are 
improperly  holding  back  the  net  profits.  Some  courts 
take  the  view  that  as  directors  have  a  very  large  dis- 
cretionary power,  they  cannot  be  forced  to  declare  a 
dividend  unless  there  has  been  bad  faith  on  their  part. 
Others  say  that  if  the  directors  have  no  reasonable 
ground  for  not  declaring  a  dividend,  they  are  bound 
to  do  it.  If  the  directors  are  about  to  declare  dividends 
illegally,  they  may  be  restrained  by  the  stockholders; 
but,  as  a  rule,  the  entire  management  of  this  question 
is  left  in  their  hands. 

4.  Right  to  Share  in  the  Surplus  remaining  after  the  Cor- 
poration is  Dissolved.  —  The  stockholders   also    have  a 


RIGHTS  OF  STOCKHOLDERS  327 

right  to  the  property  owned  by  the  corporation,  after  the 
latter  has  ceased  to  exist.  As  we  have  pointed  out, 
while  the  corporation  is  in  existence  the  property  is  not 
owned  by  the  stockholders,  but  by  the  corporation  itself. 
It  was  formerly  thought  that  when  the  corporation  ceased 
to  exist,  this  property  would  revert  to  the  state.  This 
view,  however,  has  now  been  abandoned;  and  it  is  well 
settled  that  if  the  corporation  has  ceased  to  exist  in  any 
of  the  ways  enumerated  above,  and  its  debts  have  been 
paid  in  full,  then  the  surplus  remaining  should  be 
distributed  to  the  stockholders,  in  proportion  to  the 
face  value  of  the  stock  which  each  holds. 

5.  Transfer  of  Shares  of  Stock.  —  A  stockholder's  right 
in  a  corporation,  as  represented  by  his  certificate  of 
stock,  is  personal  property.  It  may  be  bought  and  sold 
just  like  personal  property,  as  we  have  already  explained. 
We  have  not,  however,  indicated  the  manner  in  which 
these  transfers  may  take  place.  Not  only  has  the  stock- 
holder a  certificate  of  stock  to  represent  his  claim,  but 
his  name  is  recorded  upon  the  books  of  the  company  as 
the  legal  owner  of  the  stock.  Provision  is  usually  made 
by  all  corporations  that  no  person  shall  be  recognized  as 
a  stockholder  of  the  company,  or  be  entitled  to  divi- 
dends, or  the  right  to  vote,  until  his  name  has  been 
properly  entered  upon  the  company's  books. 

Suppose  you  are  the  owner  of  a  certificate  of  stock 
which  you  desire  to  sell  to  me.  You  transfer  it  to  me, 
but  do  not  have  the  transfer  recorded  upon  the  books 
of  the  company.  You  are  still  the  legal  owner  of  the 
stock;  if  any  dividends  are  to  be  paid,  they  will  be  paid 
to  you.  It  is  true  that  inasmuch  as  I  am  the  real 
owner  of  the  stock,  I  may  perhaps  succeed  in  forcing 
you  to  pay  this  dividend  over  to  me;   but  the  point  is, 


328  BUSINESS  ASSOCIATIONS 

you  are  still  the  owner  until  my  name  has  been  recorded 
upon  the  books  of  the  company. 

It  may  be  objected  that  this  would  be  unjust,  in  that 
you  may  not  see  fit  to  order  the  company  to  change 
the  name.  That,  however,  is  a  minor  consideration.  If 
you  have  transferred  your  certificate  of  stock  to  me,  I 
may  go  to  the  company  and  present  it  to  its  officers,  and 
they  will  transfer  the  stock  to  my  name  without  any 
action  on  your  part.  If  they  refuse  to  do  so,  I  may  file 
a  bill  in  equity  and  force  them  to  do  so.  But  not  until 
that  is  done  am  I  the  legal  owner  of  the  stock. 

The  officers  cannot,  for  any  reasons  of  their  own, 
refuse  to  record  the  purchaser  upon  the  books  of  the 
company.  A  had  made  himself  very  obnoxious  to  the 
Standard  Oil  Company  by  writing  a  pamphlet  in  which 
he  savagely  attacked  their  methods.  Subsequently, 
when  he  had  purchased  some  stock  of  that  corporation, 
its  officers  refused  to  record  his  name  as  legal  owner. 
He  applied  to  a  court  of  equity  and  forced  them  to 
do  so. 


CHAPTER  V 

LIABILITY  OF  A  COKPORATION 

1.  Liability  of    a   Corporation  for    its  Contracts.  —  A 

corporation,  as  such,  is  responsible  for  all  obligations 
into  which  it  enters,  provided  the  contract  or  obligation 
is  undertaken  in  the  proper  manner,  and  is  within  the 
power  conferred  upon  the  corporation  by  its  charter. 
The  principal  contracts  made  by  a  corporation  should 
be  signed  by  its  officers  and  sealed  with  the  corporate 
seal.  It  was  formerly  thought  that  all  contracts  of  the 
corporation  had  to  be  sealed  in  this  manner,  in  order  to 
be  binding. 

The  theory  was,  that  the  only  way  in  which  the  cor- 
poration could  contract  was  by  means  of  its  common 
seal;  that  inasmuch  as  it  had  no  personality,  or  only  a 
fictitious  personality,  it  could  not  make  a  contract  by 
word  of  mouth  because  it  had  no  tongue  with  which 
to  speak.  This  was  an  absurd  argument,  however,  for, 
as  was  pointed  out  by  one  of  the  judges  before  whom 
this  view  of  the  case  was  urged,  although  a  corporation 
has  no  tongue  with  which  to  speak,  neither  has  it  a  hand 
with  which  to  write ;  and  if  you  take  the  view  that  it  can- 
not make  a  contract  by  word  of  mouth  because  it  has  no 
tongue,  neither  can  it  make  a  written  contract,  because 
it  has  no  hand  with  which  to  sign  or  to  affix  the  seal. 

It  is  now  well  settled  that  minor  contracts  do  not  have 
to  be  sealed.  If  it  were  necessary  to  affix  the  corporate 
seal  to  every  contract  that  was  made  with  the  myriads  of 

329 


330  BUSINESS  ASSOCIATIONS 

workmen  who  are  employed  by  a  great  railroad,  or  for 
each  one  of  the  thousands  of  little  contracts  which  must 
be  made,  it  would  give  rise  to  endless  trouble.  Such 
contracts  may  be  made  by  the  proper  officers  of  the  cor- 
poration, practically  in  the  same  manner  that  any  in- 
dividual may  make  a  contract.  The  only  difference  is 
that  the  corporation  is  incapable  of  making  a  contract 
itself,  either  orally  or  in  writing,  but  must  always  do 
it  through  its  agents. 

2.  Liability  for  Contracts  of  Promoters.  —  Sometimes 
individuals  who  are  attempting  to  organize  a  corpora- 
tion, will  make  promises  on  behalf  of  the  corporation 
when  it  has  not  yet  come  into  existence.  The  question 
is,  Will  such  contracts  bind  the  corporation  after  it  has 
become  organized?  Suppose  A,  B,  and  C  are  promoters 
of  a  mining  company;  they  make  a  proposition  to  X 
to  the  effect  that  if  he  will  secure  subscriptions  to  one 
hundred  thousand  dollars'  worth  of  stock,  the  company 
will  pay  him  ten  thousand  dollars.  X  spends  a  great 
deal  of  time  and  money  in  getting  the  necessary  sub- 
scriptions, and,  after  the  company  is  organized,  asks  for 
his  money,  but  is  refused.  He  brings  suit  against  the 
corporation.  The  corporation  defends  itself  by  saying, 
that  as  it  was  not  in  existence  at  the  time  this  agree- 
ment was  entered  into,  no  contract  was  ever  made ;  that 
he  could  not  have  made  a  contract  with  a  principal 
who  did  not  exist,  even  though  he  had  dealt  with  one 
who  pretended  to  be  an  agent. 

This,  of  course,  is  true,  but  at  the  same  time  it  seems 
very  unjust  to  say  that  in  such  a  case  as  this  X  could 
not  recover.  The  argument  given,  however,  is  theoret- 
ically correct,  and  if  X  attempted  to  rely  upon  his  con- 
tract, he  probably  would  not  be  allowed  to  recover. 


LIABILITY  OF  A   CORPORATION  331 

In  such  a  case,  however,  he  would  be  allowed  to  re- 
cover, not  on  the  principle  of  contracts,  but  on  the  prin- 
ciple of  "quasi  contracts."  Without  going  into  the 
discussion  of  what  we  mean  by  quasi  contracts  at  this 
point,  it  is  sufficient  to  say  that  if  one  man  has  conferred 
some  benefit  upon  another  at  his  request,  even  though 
there  was  no  contract  between  them,  the  second  person 
is  bound  to  pay  what  the  benefit  is  reasonably  worth.  X 
certainly  has  conferred  the  greatest  possible  benefit  upon 
the  corporation,  because  if  it  had  not  been  for  his 
services  in  securing  the  subscriptions  to  the  stock,  the 
corporation,  possibly,  never  could  have  come  into  exist- 
ence at  all.  It  may  be  objected  that  the  corporation  did 
not  request  X  to  confer  these  benefits  upon  it  and  had 
no  opportunity  to  express  its  desire  either  to  accept  or 
refuse  them ;  but  the  answer  to  this  is,  that  the  corpo- 
ration could  not  have  refused  to  accept  them,  for  to 
have  done  so  would  have  been  ruinous,  inasmuch  as 
the  benefits  were  absolutely  necessary  to  its  corporate 
existence.  Upon  this  theory,  X  would  be  permitted 
to  recover.  In  some  states,  if  the  corporation,  after 
becoming  fully  organized,  passes  a  vote  by  which  it 
adopts  or  ratifies  a  contract  made  on  its  behalf  by  the 
promoters,  that  contract  will  bind.  This  view,  while 
theoretically  faulty,  works  substantial  justice. 

3.  Liability  of  Corporation  irregularly  Organized.  —  We 
have  referred  above  to  a  corporation  which  has  failed  to 
become  properly  organized  by  reason  of  its  non-con- 
formity to  the  law.  We  have  seen  that  in  such  a  case 
a  contracting  party  cannot  charge  the  stockholders,  as 
partners.  Suppose,  however,  a  corporation  is  sued  by 
a  person  who  has  made  a  contract  with  it,  and  it  seeks 
to  escape  liability  by  saying  that  it  was  not  properly 


332  BUSINESS   ASSOCIATIONS 

organized,  and  is  really  not  a  corporation  at  all,  and, 
consequently,  never  could  be  liable  on  a  contract.  It 
is  only  necessary  to  state  this  proposition  to  see  how 
absurd  it  would  be  for  the  courts  to  entertain  it.  If  a 
corporation  has  traded  as  a  corporation,  has  contracted 
as  a  corporation,  has  led  innocent  parties  to  believe  that 
it  is  a  corporation,  it  cannot  now,  while  being  sued 
upon  these  contractual  obligations  into  which  it  has 
entered,  escape  liability  by  saying  that  it  never  was  a 
corporation  at  all.  The  court  will  not  allow  it  to  say 
this.     It  is  said  to  be  "estopped  "  from  saying  it. 

4.  Liability  for  Ultra  Vires  Acts.  —  We  have  before 
referred  to  the  fact  that  the  power  of  a  corporation  is 
limited.  But  if  it  has  done  an  act  which  it  has  no 
power  to  do,  does  that  subject  it  to  any  liability?  If 
so,  how  great  a  liability  ?  This  question  is  involved 
in  a  great  deal  of  difficulty,  and  a  detailed  discussion 
would  lead  us  into  an  argument  entirely  inappropriate 
in  a  book  of  this  character.  It  is  sufficient  to  state  that 
in  American  courts,  if  a  contract  has  been  made  which 
is  clearly  beyond  the  power  of  the  corporation  to  make, 
and  neither  party  has  performed  his  part,  such  a  contract 
is  void,  and  no  rights  are  thereby  acquired  by  either 
over  the  other. 

If,  however,  one  of  the  parties  has  fully  performed 
his  part  of  the  contract  and  has  conferred  a  substantial 
benefit  upon  the  other,  he  usually  is  allowed  to  recover, 
whether  he  is  the  individual  or  the  corporation.  Some 
courts  treat  the  contract  as  being  binding,  although 
illegal.  Others  treat  it  as  void,  but  allow  the  plaintiff 
to  recover  on  the  theory  of  "quasi  contract,"  to  which 
we  have  referred  in  the  preceding  paragraph.  In  either 
event,  the  fact  that  the  corporation  has  made  a  contract 


LIABILITY  OF  A  CORPORATION  333 

beyond  the  scope  of  its  authority  subjects  it  to  the  lia- 
bility of  having  its  charter  forfeited. 

5.  Liability  for  Torts.  —  We  have  learned  that  con- 
tracts which  are  made  by  the  agents  of  a  corporation  on 
its  behalf,  will  bind  it,  just  as  contracts  made  by  an 
agent  on  behalf  of  an  individual  will  bind  him. 
Similarly,  torts  committed  by  the  agents  of  a  corpora- 
tion subject  it  to  liability  in  much  the  same  manner 
as  do  torts  of  the  agents  of  natural  persons.  It  was 
formerly  thought  that  a  corporation  could  not  be 
held  responsible  for  a  tort,  like  deceit,  involving 
some  moral  wrong,  the  theory  being  that  the  corpora- 
tion could  not  do  anything  morally  wrong  because 
it  was  only  an  artificial  person,  and  consequently 
was  incapable  of  wrong  intentions.  That  view  of  the 
case  has  been  abandoned.  It  is  founded  upon  the 
same  foolish  idea  that  the  corporation  is  responsible 
only  for  those  things  it  can  do  itself.  The  only  ex- 
ception to  the  rule  that  corporations  are  responsible 
for  the  torts  of  their  agents,  is  in  the  case  of  charitable 
corporations.  A  hospital,  for  instance,  would  not  be 
responsible  for  the  wrongful  acts  of  its  servants.  This 
rule  is  based  partly  upon  theoretical  considerations, 
but  mostly  upon  grounds  of  public  policy. 

6.  Liability  for  Crimes  of  its  Agents.  —  Manifestly  a 
corporation  cannot  commit  crime,  but  it  may  be  respon- 
sible for  the  criminal  acts  of  its  agent  to  the  same  extent 
that  an  individual  may  be  responsible  for  the  criminal 
acts  of  his  agent.  We  have  seen  that  the  publisher  of 
a  newspaper  may  be  criminally  responsible  for  libel 
appearing  in  it.  If  the  publisher  is  a  corporation,  that 
corporation  may  be  responsible  in  the  same  manner. 


CHAPTER  VI 

RELATION  OF  A  CORPORATION  TO  THE  STATE 

1.  Ultra  Vires  Acts We  have  elsewhere  referred  to 

the  fact  that  the  state  has  a  more  or  less  direct  control 
over  the  corporations  which  it  charters.  It  grants  to 
them  certain  powers,  and  impliedly  forbids  the  exercise 
or  the  attempt  to  exercise  any  powers  not  specifically 
granted  to  them.  If  they  have  gone  beyond  the  limits, 
the  attorney-general  of  the  state  maybegin  proceedings 
against  them  in  the  courts ;  and  if  it  be  proven  that  they 
have  done  acts  which  they  have  no  power  to  do,  their 
charters  may  be  forfeited. 

2.  Illegal  Acts.  —  It  goes  without  saying  that  a  cor- 
poration is  impliedly  forbidden  to  do  any  illegal  act. 
Any  act  beyond  its  authority  is  known  as  an  ultra  vires 
act.  Any  act  which  at  common  law  would  be  illegal, 
even  if  performed  by  a  private  person,  would  not  only 
be  beyond  the  power  of  the  corporation,  but  would 
also  be  an  actual  infringement  of  the  law.  The  most 
common  act  of  this  character  of  which  corporations  are 
guilty  is  an  illegal  combination  to  create  a  monopoly, 
or  a  trust.  Corporations  often  enter  into  agreements 
among  themselves,  by  which  they  provide  that  they  will 
charge  certain  prices,  that  they  will  not  compete  with 
each  other  in  certain  districts,  that  they  will  regulate 
the  price  of  raw  material,  etc. 

334 


RELATION  OF  A  CORPORATION  TO  THE  STATE   335 

These  combinations  are  of  such  a  nature  that  an 
immense  power  is  placed  in  the  hands  of  the  combined 
capital  and  other  resources  of  the  different  organiza- 
tions. It  is  a  power  which  many  statesmen  deem 
extremely  dangerous  to  the  welfare  of  the  community. 
Whether  this  is  actually  true  or  not  cannot  be  deter- 
mined in  our  present  knowledge  of  the  subject.  But  if 
such  a  formation  is  made  with  the  deliberate  object  of 
creating  a  monopoly,  it  is  contrary  to  the  common  law, 
and  therefore  is  illegal.  If  a  corporation  enters  into 
such  a  contract,  it  has  subjected  itself  to  the  liability 
of  punishment  by  forfeiture  of  its  charter;  and  more 
than  one  corporation  has  come  to  grief  in  this  manner. 
The  full  discussion  of  this  subject  belongs  perhaps  more 
properly  to  political  economy,  or  to  legal  treatises  which 
go  much  more  deeply  into  the  subject  than  we  can. 


SECTION  III 

LIMITED  PARTNERSHIPS  AND  JOINT-STOCK 
COMPANIES 


CHAPTER  I 

LIMITED  PARTNERSHIPS 

1.  Distinction  between  Limited  Partnerships  and  Corpora- 
tions. —  Before  leaving  the  subject  of  business  associa- 
tions, we  will  briefly  discuss  some  hybrid  organizations 
which  stand  midway  between  a  partnership  and  a  cor- 
poration. One  of  these  is  called  a  limited  partnership. 
This  limited  partnership  can  be  formed  only  when  a 
special  act  of  the  legislature  of  the  state  in  which  the 
parties  are  proposing  to  do  business  provides  for  it. 
It  differs  from  an  ordinary  partnership  in  that  one  or 
more  of  the  partners  may  invest  their  capital  in  the 
business,  without  becoming  personally  liable  for  the 
debts  of  the  firm.  It  differs  from  a  corporation  in  that 
there  are  no  shares  of  stock,  there  is  no  corporate  organ- 
ization, and  some  of  the  individuals  are  general  part- 
ners, and  are  personally  responsible  as  such. 

2.  General  and  Special  Partners.  —  When  the  parties 
desire  to  organize  a  limited  partnership,  they  are  com- 
pelled to  go  through  certain  formalities,  which,  as  a 
rule,  are  even  more  stringent  than  the  formalities  for 

336 


LIMITED  PARTNERSHIPS  337 

the  organization  of  a  corporation.  The  limited  part- 
nership is  composed  of  general  and  special  partners. 
The  general  partners  have  active  control  of  the  business, 
and  their  liability  does  not  differ  from  the  liability  of 
ordinary  partners.  The  special  partners  invest  capital 
in  the  business,  but  have  no  active  control  over  it,  and 
are  liable  only  to  the  extent  of  the  capital  invested. 

In  order  that  this  immunity  may  be  conferred  upon  a 
special  partner,  however,  it  is  absolutely  necessary  that 
all  the  stipulated  regulations  shall  be  conformed  to  by 
the  parties  forming  the  association.  These  regulations 
are,  usually,  that  the  parties  shall  file  a  statement  in  a 
book  kept  for  that  purpose  in  the  court  house  of  the 
county  where  the  partnership  is  to  do  business,  giving 
the  names  of  the  general  partners  and  the  special  part- 
ners, the  character  of  the  business  they  intend  to  carry 
on,  the  amount  of  the  capital  invested  by  the  special 
partners,  etc.  They  are  then  compelled  to  publish  the 
firm  name  in  such  a  way  that  the  public  may  know 
who  are  general  and  who  are  special  partners. 

3.  Effect  of  Failure  to  Conform  to  the  Statutory  Rules.  — 
We  have  seen  that  the  stockholders  of  an  irregularly 
formed  corporation  cannot  be  charged  as  partners.  Just 
the  reverse  is  true  in  the  case  we  are  now  discussing. 
A  limited  partnership  is  not  a  corporation.  Its  mem- 
bers do  not  have  immunity,  except  as  such  immunity  is 
conferred  upon  them  by  reason  of  their  compliance  with 
the  statutes.  If  they  fail  to  comply  they  are  partners, 
and  the  special  partner  is  just  as  responsible  as  a 
general  partner.  Consequently,  if  at  any  time  you 
wish  to  invest  your  capital  in  this  way,  it  is  to  your 
interest  to  see  that  every  single  particular  required 
by  the  law  has  been  complied  with. 


CHAPTER  II 

PARTNERSHIP  ASSOCIATIONS  OR  JOINT-STOCK 
COMPANIES 

1.  Distinction  between  Joint-stock  Company  and  Limited 
Partnership.  —  The  other  form  of  business  association 
which  is  similar  to,  and  yet  different  from,  the  corpora- 
tion or  the  partnership,  is  what  is  known  as  a  partner- 
ship association,  or  joint-stock  company.  This  form  of 
association  is  also  often  called  a  "limited  partnership." 
The  name  differs  in  different  states.  This  also  is 
an  association  created  by  statutory  law,  and  does  not 
exist  at  common  law.  A  joint-stock  company  is  more 
nearly  like  a  corporation  than  it  is  like  a  partnership. 
Its  members  usually  hold  shares  of  stock  to  represent 
their  claims  to  a  share  in  the  business.  The  active 
management  of  the  concern  is  carried  on  by  officers 
who  are  elected  very  much  as  officers  are  elected  in  a 
corporation,  and  the  members  are  responsible  only  for 
the  amount  of  the  stock  which  they  have  contributed. 
The  character  of  the  joint-stock  company,  and,  indeed, 
of  the  limited  partnership,  varies  in  the  different 
states  by  reason  of  the  fact  that  these  associations 
exist  only  by  virtue  of  particular  state  statutes.  In 
most  of  them,  however,  the  general  features  of  the  joint- 
stock  companies  are  as  we  have  indicated.  In  the  state 
of  Pennsylvania,  a  very  recent  act  has  been  passed  which 
creates  a  kind  of  joint-stock  company  which  is  almost 
exactly  like  a  corporation,  except  in  the  one  circum- 
stance that  it  has  much  greater  powers. 

338 


PARTNERSHIP  ASSOCIATIONS  339 

2.  Statutory  Requirements.  —  This  form  of  association, 
which,  it  should  be  repeated,  is  often  called  a  limited 
partnership,  must  also  be  formed  in  a  particular  manner, 
or  the  persons  associating  themselves  together  succeed 
only  in  forming  a  general  partnership.  The  names  of 
the  members,  the  capital  invested  by  each,  etc.,  must  be 
recorded,  as  in  the  case  of  limited  partnerships,  and, 
in  addition,  the  word  "  limited "  must,  as  a  rule,  be 
added  to  the  name  of  the  firm  which  is  exhibited  at  the 
place  of  business.  This  word  "limited  "  is  for  the  pur- 
pose of  notifying  the  public  that  the  members  are  not 
under  an  absolute  liability  to  the  creditors  of  the 
association. 

3.  Effect  of  Failure  to  Conform  to  the  Statutory  Require- 
ments.—  It  should  be  remembered  that  business  asso- 
ciations are  divided  into  two  types,  partnerships  and 
corporations.  If  the  association  is  a  corporation,  then, 
prima  facie,  its  members  are  not  liable  for  the  debts  of 
the  association.  If  it  be  a  partnership,  however,  they 
are,  prima  facie,  liable,  unless  they  are  relieved  from  that 
liability  by  some  particular  rule  of  law.  Inasmuch  as 
limited  partnerships  and  joint-stock  companies  are  not 
corporations,  they  are  therefore  partnerships,  upon  the 
members  of  which  the  law  has  conferred  immunity  from 
personal  liability.  The  result  is,  that  in  the  case  of  a 
joint-stock  company,  just  as  in  the  case  of  a  limited 
partnership,  if  the  parties  fail  properly  to  organize,  so 
that  they  have  not  formed  a  stock  company,  the  members 
are  individually  liable.  The  law  will  treat  them  as 
partners,  unless  by  exact  conformity  to  the  requirements 
of  the  statute  they  have  brought  themselves  within  the 
immunity  which  is  offered  by  its  terms. 


DEFINITIONS 

Acceptance :  The  writing  of  the  drawee  upon  a  bill  of  exchange 

by  which  he  agrees  to  pay  it. 
Acceptance  for  Honor :  Acceptance,  for  the  protection  of  the 

drawer,  by  a  person  other  than  the  drawee. 
Acceptor :  One  to  whom  a  bill  of  exchange  is  directed  and  who 

agrees  to  pay  it  at  maturity. 
Accommodation  Indorser :   One  who  indorses  a  note  without 

consideration,  to  enable  another  to  raise  money  upon  it. 
Action  :  A  suit  at  law. 
Administrator  :  A  person  appointed  by  the  court  to  settle  the 

affairs  and  distribute,  according  to  law,  the  property  of  one 

who  has  died  intestate  (without  making  a  will). 
Agent :  One  who  acts  for  another,  called  his  principal. 
Anomalous  Indorsement :  Indorsement  by  a  person  who  is  not 

the  owner  of  a  promissory  note  or  bill  of  exchange. 
Assets :  All  the  valuable  property  belonging  to  an  individual,  a 

corporation,  or  a  partnership. 
Assignee :  One  to  whom  an  assignment  has  been  made. 
Assignment :  A  transfer  of  rights  by  one  person  to  another. 
Assignor :  One  who  makes  an  assignment. 
Assigns :  Persons  to  whom  an  assignment  has  been  made. 
Bailee:  One  who  makes  a  contract  for  the  temporary  possession 

of  property  belonging  to  another. 
Bailment :  Contract  by  which  property  of  one  person  is  tempora- 
rily placed  in  the  possession  of  another,  with  a  proviso  for  its 

return. 
Bailor :  One  who  makes  a  contract  for  the  bailment  of  property 

to  another. 
Bankrupt :  One  who  has  done  some  act  indicating  his  inability  to 

pay  his  debts. 
Bankruptcy  :  Inability  of  a  person  to  pay  his  debts. 

341 


342  DEFINITIONS 

Barter  :  The  exchange  of  one  piece  of  property  for  another  piece 

of  property. 
Bill  of  Exchange  :  A  written  order  from  one  person  to  another, 

directing  the  one  to  whom  it  is  addressed  to  pay  to  a  third 

person  a  sum  of  money  named  therein. 
Bill  in  Equity  :  A  petition  addressed  to  a  court  of  equity,  setting 

forth  some  injury  which  has  been  received  by  the  complainant, 

and  asking  for  redress. 
Bona  fide  :  In  good  faith,  done  with  perfect  honesty  of  intention. 
Carrier  :  One  who  transports  persons  or  goods. 
Caveat  Emptor  :  Let  the  buyer  beware. 
Caveat  Venditor  :  Let  the  seller  beware. 
Cestui  Que  Trust :  One  for  whose  benefit  property  is  held  by  a 

trustee. 
Chattel :  An  object  of  personal  property. 
Check :  A  written  order  addressed  to  a  bank  by  a  person  having 

funds  deposited  therein,  requesting  the  bank  to  pay  to  some 

one  named  in  the  check  a  definite  sum  of  money. 
Civil  Law  :  The  body  of  law  originally  derived  from  the  Romans, 

and  now  generally  in  force  in  Continental  Europe. 
Collateral  Security :  A  separate  obligation  attached  to  another 

contract  to  guarantee  its  performance. 
Common  Law  :  A  body  of  rules  handed  down  in  England  from 

time  immemorial,  to  govern  the  relations  of  men  in  ordinary 

civil  affairs. 
Consideration :  Anything  of  legal  value  which  is  given  by  one 

person  to  another  for  the  making  of  a  promise. 
Consignee  :  One  to  whom  goods  are  shipped. 
Consignor  :  One  who  ships  goods  to  another. 
Co-owner :  One  who  owns  property  jointly  with  another. 
Co-proprietors  :  Persons  who  are  joint  owners  of  property  and 

act  together  in  its  management. 
Corporation :  An  artificial  person  created  by  an  act  of  legislature. 
Court  of  Equity  :  A  court  which  administers  justice  according  to 

the  principles  of  equity. 
Court  of  Law :  A  court  which  administers  justice  according  to 

the  Common  Law. 
Covenant :  An  agreement  contained  in  a  deed. 
Crime  :  Violation  of  public  rights. 


DEFINITIONS  343 

Deed  :  A  sealed  contract  for  the  transfer  of  property. 

De  facto  :  As  a  matter  of  fact. 

Default :  Non-performance  of  duty. 

Defendant :  One  against  whom  a  suit  at  law  is  brought. 

Delivery  :  The  transfer  of  the  possession  of  an  article  to  another 
person. 

Digest :  A  compilation  arranged  in  an  orderly  manner. 

Doctrine  of  Marshalling  :  A  rule  of  law  which  provides  that  if  a 
creditor  has  a  claim  upon  two  funds  for  the  payment  of  his 
debt,  he  must  use  the  fund  against  which  there  are  no  other 
claims,  before  he  is  allowed  to  take  that  which  is  also'  respon- 
sible for  the  payment  of  other  debts  than  his  own. 

Drawer  :  One  who  draws  a  bill  of  exchange. 

Duress  :  Actual  or  threatened  violence. 

Embezzle :  To  appropriate  to  one's  own  use,  money  of  another 
temporarily  in  one's  possession. 

Escrow  :  Safe-keeping  —  applied  to  deeds  which  are  retained  for 
future  delivery  to  the  person  named  in  the  deed. 

Estoppel :  A  rule  of  law  by  which  one  is  forbidden  to  assert  a  fact 
which  he  has  previously  denied,  either  by  his  conduct  or  by 
his  words. 

Executor  :  A  person  named  in  a  will,  to  carry  out  its  provisions, 
or  a  person  appointed  by  the  court  for  the  same  purpose. 

Executory :  To  be  performed  in  the  future. 

Factor  :  A  commission  merchant,  —  a  person  entrusted  by  another 
with  the  latter's  goods  for  the  purpose  of  sale. 

Fraud :  The  unlawful  appropriation  of  another's  property  by 
means  of  false  representations  or  deceptive  acts. 

Guaranty  :  An  engagement  to  pay  the  debt  of  another,  upon  his 
failure  to  do  so. 

Guardian :  One  appointed  to  take  charge  of  the  person  or  prop- 
erty of  another,  or  both,  by  reason  of  some  disability  of  the 
latter,  such  as  minority,  lunacy,  or  feeble-mindedness. 

Indorsee  :  One  to  whom  an  indorsement  is  made. 

Indorsement:  A  writing  on  the  back  of  a  promissory  note  or 
bill  of  exchange,  by  the  owner  thereof,  for  the  purpose  of 
transferring  it  to  another  party. 

Indorsement  in  blank :  An  indorsement  in  which  the  name  of 
the  indorsee  is  omitted. 


344  DEFINITIONS 

Indorsement  in  full:  An  indorsement  to  a  definite  person. 
Indorsement   without  recourse :    Method  of  indorsement  by 

which  the   indorser  passes   title  without  rendering  himself 

responsible  for  the  payment  of  the  instrument. 
Indorser :  One  who  indorses. 
Infant :  Any  person  under  the  legal  age  of  majority,  usually  fixed 

at  twenty-one  years. 
Insolvency  :  Inability  to  pay  debts. 
Insolvent :  One  who  is  unable  to  pay  his  debts,  —  state  of  being 

unable  to  pay  one's  debts. 
International  Law  :  The  customs  and  usages  observed  by  nations 

in  their  intercourse  with  one  another. 
Intestate :  One  who,  having  lawful  power  to  make  a  will,  has 

made  none,  —  the  state  of  one  who  dies  without  a  will. 
Joint-Stock  Companies :  Partnerships  in  which  the  liability  of 

members  for  firm  debts  is  limited  to  the  amount  of  their 

investment. 
Lease :  A  contract  for  the  use  of  property  and  its  return  to  the 

owner. 
Legal  Tender :  The  money  which  one  is  bound  by  law  to  accept 

in  legal  satisfaction  of  a  debt. 
Lien :  A  claim  which  one  person  has  upon  the  property  of  another 

as  security  for  some  debt  owed  by  the  latter  to  the  former. 
Liquidated  Damages :   Sums  of  money  agreed  to  be  paid  by 

parties  to  a  contract  in  case  of  its  breach. 
Litigation :   A  contest  in  a  court  of  justice,  for  the  purpose  of 

enforcing  a  right. 
Maker :  One  who  has  made  a  promise  in  a  promissory  note. 
Merger:    The  dissolution  of  one  contract  by  the  formation  of 

another  having  superior  legal  force,  relating  to  the  same  sub- 
ject-matter. 
Misrepresentation :    An  unwittingly  false  statement  about  the 

subject-matter  of  a  contract. 
Mistake:  An  error  as  to  a  material  fact  involved  in  a  con- 
tract. 
Municipal  Law :  Body  of  law  which  governs  the  civil  actions  of 

the  resident  of  a  nation. 
Negotiable    Paper :    Contracts  to  pay  money,  which,  by  their 

nature,  are  freely  transferable  from  hand  to  hand. 


DEFINITIONS  345 

Negotiate :  To  transfer  negotiable  paper  from  one  party  to 
another. 

Nominal  Partner:  A  person  who,  though  not  really,  is  appar- 
ently a  partner  in  a  firm,  and  who,  by  virtue  of  his  osten- 
sible connection  with  it,  is  liable  for  the  obligations  of  the 
firm. 

Notary  Public :  A  public  officer  authorized  by  law  to  make 
official  records  and  to  administer  oaths. 

Offeree :  One  to  whom  an  offer  is  made. 

Offeror :  One  who  makes  an  offer. 

Ordinances  :  Laws  passed  by  City  Councils. 

Parole  Contract :  Any  contract,  whether  oral  or  written,  which 
is  not  under  seal. 

Partnership :  A  relation  existing  between  individuals  who  are 
conducting  business  jointly,  and  which  fastens  upon  each  cer- 
tain legal  responsibilities. 

Partnership  Associations :  Partnerships  in  which  the  liability 
of  members  for  firm  debts  is  limited  to  the  amount  of  their 
investment. 

Payee :  One  to  whom  money  is  to  be  paid  according  to  contract. 

Per  se  :  In  itself.  * 

Personal  Property  :  Any  tangible  object  not  permanently  attached 
to  land.     In  general,  movable  goods. 

Plaintiff :  One  who  inaugurates  a  suit  at  law. 

Possession  :  The  physical  control  of  property. 

Power  of  Attorney :  An  instrument  under  seal  designating  a 
person  as  agent  and  describing  his  authority. 

Precedent :  A  ruling  of  a  court  in  an  individual  dispute,  which 
becomes  a  model  for  future  controversies  of  kindred  nature. 

Principal :  One  who  invests  a  second  person  with  authority  to 
act  as  agent  for  him. 

Promisee  :  One  to  whom  a  promise  is  made. 

Promisor :  One  who  makes  a  promise. 

Promissory  Note :  A  written  promise  to  pay  a  certain  sum  of 
money  at  a  future  time,  unconditionally. 

Protest :  A  certification  by  a  notary  public  that  a  bill  or  note  has 
been  refused  payment  at  maturity. 

Proxy  :  One  who  is  given  the  power  to  vote  in  place  of  another. 

Public  Policy  :  The  general  rules  and  spirit  of  the  law. 


346  DEFINITIONS 

Ratification-:    Approving  something  done  without  authority  by 

another. 
Real  Property :  Land  and  its  appurtenances. 
Resident :  One  who  lives  permanently  in  a  certain  place. 
Sale  :  The  transfer  of  ownership  in  property  for  a  price  in  money. 
Sanction :    The  consequences  entailed  by  a  breach  of  positive 

law. 
Seal :  An  impression  upon  wax,  or  a  scroll,  placed  after  the  signa- 
ture of  a  contract  or  deed,  to  give  it  added  solemnity. 
Simple  Contract :  Any  contract,  whether  oral  or  written,  which 

is  not  under  seal. 
Special  Partner  :  One  who  invests  capital  in  a  partnership  and  is 

liable  for  its  debts  only  to  the  extent  of  his  investment. 
Specific  Performance  :  The  actual  performance  of  a  contract  by 

the  party  bound  to  fulfil  it. 
Statute  Law  :  Law  enacted  by  legislative  bodies. 
Statute  of  Frauds  :  A  law  providing  that  the  evidence  of  certain 

contracts  shall  be  in  writing. 
Statute  of  Limitations  :  A  statute  providing  that  no  suits  at  law 

can  be  had  upon  certain  transactions  after  the  expiration  of  a 

specified  number  of  years  from  the  time  of  their  occurrence. 
Statutes  :  Enactments  of  legislative  bodies. 
Stockholder :   One  who  owns  a  certain  interest  in  a  corporation, 

which  is  represented  by  a  share  of  stock. 
Stoppage  in  Transitu  :  Right  of  a  consignor  to  recover  possession 

of  goods  from  a  carrier  before  they  have  reached  the  end  of 

their  journey,  provided  the  consignee  has  become  insolvent. 
Surety:  An  engagement  to  undertake  the  duties  of  another  on 

the  failure  of  the  latter  to  perform  them. 
Tender :  An  offer  of  payment. 
Testator :  A  person  who  makes  a  will. 
Tort :  An  infringement  of  private  rights. 

Transferee :  One  to  whom  the  title  of  personal  property  is  passed. 
Transferor  :  One  who  transfers  title  to  personal  property. 
Trustee  :  One  who  holds  and  employs  property  for  the  benefit  of 

others. 
Ultra  vires  :  Beyond  the  powers. 
Vendee:  One  to  whom  something  has  been  sold. 
Vendor :  One  who  sells. 


DEFINITIONS  347 

Void  :  Of  no  force  whatever. 

Voidable  :  Capable  of  becoming  void  or  valid  according  to  subse- 
quent events. 

Voting  Trust :  A  limited  number  of  individuals  to  whom  the 
voting  power  of  one  or  more  corporations  is  entrusted. 

Waiver:  A  renunciation  of  rights. 

Ward :  One  whose  person  or  property,  or  both,  has,  on  account  of 
some  disability,  —  minority,  lunacy,  feeble-mindedness,  —  been 
placed  in  the  charge  of  another  person. 

Warranty :  An  agreement  that  articles  sold  shall  possess  certain 
characteristics. 


INDEX 


Acceptance,  communication  of,  32; 
revocation  of,  37. 

Acceptance  of  bill  of  exchange,  how 
made,  186;  meaning  of,  187. 

Acceptor  liability  of,  194. 

Acceptor  for  honor,  194. 

Accommodation  paper,  209. 

Act  of  God,  242. 

Act  of  Public  Enemy,  244. 

Agency,  termination  of,  284. 

Agents,  classification  of,  261 ;  defini- 
tion of,  261  ;   duties  of,  282  ;   gen- 
eral, 261  ;    liability  of,  for  torts, 
276 ;  liability  of,  for  unauthorized 
contracts,  276 ;    liability  of  princi- 
pal for  contracts  of,  267 ;    liability 
of  principal  for  crimes   of,  274; 
liability  of  principal  for  deceit  of, 
272;  liability  of  principal  for  torts 
of,  270;   loyalty  of,  required,  282; 
necessity  for,  260 ;  public  may  rely 
upon  apparent  authority  of,  269 
right  of,  for  compensation,  279 
right  of,  for  reimbursement,  279 
special,  261 ;  who  may  be,  263. 

Alterations,  to  discharge  contracts, 
137 ;  how  made,  123. 

Ambiguous  Instruments,  184. 

Assignment  of  contracts,  103;  by 
acts  of  the  parties,  103;  by  opera- 
tion of  law,  106 ;  necessity  of  con- 
sideration for,  105. 

Authority,  delegation  of,  264. 

Bailment,  distinguished  from  sale, 
148. 

Bankruptcy,  in  discharge  of  con- 
tract, 138. 


Bill  of  exchange,  essential  character- 
istics of,  183 ;  form  of,  183 ;  purpose 
of,  182. 

Bond,  nature  of,  47. 

Business  Associations,  nature  of  ,286. 

Checks,  230;  certified,  231. 

Civil  law,  importance  of  study  of,  6 ; 
origin  of,  5. 

Common  carrier  of  goods,  an  insurer, 
242;  bound  to  charge  reasonable 
prices,  239;  contracts  to  limit 
liability  of,  247;  definition  of, 
234 ;  distinguished  from  private  car- 
rier, 235 ;  duty  not  to  discriminate, 
238 ;  duty  to  carry  for  all,  237 ;  ex- 
cuses of,  for  non-delivery  of  goods, 
245;  liability  of,  for  delay,  246; 
liability  of,  when  shipper  assumes 
responsibility,  244;  lien  of,  251; 
right  of  compensation,  250 ;  when 
liability  attaches,  241 ;  when  lia- 
bility terminates,  248. 

Common  carrier  of  passengers,  con- 
tracts limiting  liability  of,  256; 
definition  of,  252 ;  duty  not  to  dis- 
criminate, 254;  duty  to  accept  all, 
253;  liability  for  baggage,  257; 
not  an  insurer,  255  ;  right  of  com- 
pensation, 259;  right  to  make 
regulations,  259;  when  liability 
terminates,  258. 

Common  law,  development  of,  8; 
first  digest  of,  7 ;  origin  of,  6. 

Compensation,  right  of  common  car- 
rier to,  250. 

Conditional  subscriptions,  liability 
of  subscribers  for,  315. 


349 


350 


INDEX 


Conditions,  effect  of  failure  to  per- 
form, K)2;  implied,  163;  subse- 
quent, 164. 

Conflict  of  laws,  228. 

Consent,  necessity  for,  71. 

Consideration,  61 ;  absence  of,  as  a 
defence  to  negotiable  paper,  222; 
failure  of,  as  defence  to  negotiable 
paper,  223;  inadequacy  of,  50; 
meaning  of,  50 ;  moral,  66 ;  past, 
61. 

Contracts,  alteration   of,   123;    as- 
signment   of,    103;      capacity    of 
parties  to,  19 ;  classification  of,  42 
consideration    necessary    for,  42 
definition  of,  15 ;  discharge  of,  125 
essential  elements  of,  19  ;  explana- 
tion of,  119;  forbidden  by  statute, 
92;   formal,  43;  immoral,  94;  in 
restraint  of  marriage,  97;   in  re- 
straint of  trade,  97;  interpretation 
of,  114 ;  nature  of,  18 ;  of  lunatics, 
24;  of  record,  43;  persons  affected 
by,  100 ;   simple,  49 ;    to  promote 
litigation,  95. 

Contracts  of  drunken  persons,  25. 

Contracts  of  infants,  20;  ratifica- 
tion of,  22;  'which  are  binding, 
23. 

Contracts  under  seal,  necessity  for, 
42. 

Co-proprietorship,  test  of  partner- 
ship, 289. 

Corporation,  attributes  of,  308;  citi- 
zenship of,  311;  de  facto,  320; 
definition  of,  307 ;  distinguished 
from  partnerships,  306;  distin- 
guished from  limited  partnerships, 
336;  how  created,  308;  how  dis- 
solved, 312;  irregularly  formed,  320; 
irregularly  organized,  liability  of, 
331;  liability  of,  for  contracts  of 
promoters,  330;  liability  of,  for 
crimes  of  agents,  333;  liability 
of,  for  contracts;  liability  of,  for 
torts,  333;  liability  of ,  for  Ultra 
Vires  acts,  332;  organization  of, 
309;  power  of,  309. 

Courts  of  common  law,  14 ;  of  equity, 
14. 


Covenants  in  deeds,  111 ;  in  leases, 
109 ;  restrictive,  enforced  in  equity, 
112. 

Crimes,  liability  of  corporations  for, 
333. 

Crimes  of  agents,  liability  of  prin- 
cipals for,  274. 

Custom  of  merchants,  175. 

Damages  for  breach  of  contract,  139. 

Deceit  of  agent,  liability  of  principal 
for,  272. 

De  facto  corporations,  320. 

Defences,  absolute,  215;  personal, 
219. 

Delivery,  meaning  of,  157. 

Dividends,  rights  of  stockholders  to, 
325. 

Divine  law,  3. 

Divisible  contracts,  breach  of,  130. 

Doctrine  of  marshalling,  298. 

Drawee  of  a  check,  liability  of,  230. 

Drawer  of  bill  of  exchange,  condi- 
tions of  liability  of,  197;  liability 
of,  196;  when  liable  without  per- 
formance of  conditions,  207. 

Drawer  of  check,  liability  of,  230. 

Duress,  90;  as  a  defence  to  nego- 
tiable paper,  222. 

Exchange,  distinguished  from  sale, 
148. 

Extinguishment  of  negotiable  paper, 
by  alteration,  217 ;  by  cancellation, 
216;  by  release,  218;  by  re-trans- 
fer, 218. 

Factors'  acts,  155. 
Fellow-servant  rule,  279. 
Firm  creditors,  rights  of,  296. 
Formal  contracts,  43. 
Fraud,  85 ;  as  a  defence  to  negotiable 
paper,  221. 

General  partners,  336. 

Incapacity,  as  a  defence  to  negoti- 
able paper,  215. 

Illegal  acts  of  corporations,  effect  of 
charter,  334. 


INDEX 


351 


Illegality,  as  a  defence  to  negotiable 
contracts,  216 ;  effect  of,  upon  colla- 
teral contracts,  93;  as  a  personal 
defence  to  negotiable  paper,  221 ; 
as  an  absolute  defence  to  negotia- 
ble paper,  216;  effect  of  knowledge 
of,  99;  resulting  from  breach  of 
common  law,  94;  resulting  from 
breach  of  statute  law,  92. 

Impossibility  of  performance,  134. 

Indorsement,  how  made,  189;  neces- 
sity of,  188. 

Indorser,  irregular,  190 ;  liability  of, 
196 ;  conditions  of  liability  of,  197 ; 
remedy  against  a  prior  indorser, 
199 ;  when  liable  without  perform- 
ance of  conditions,  207 ;  of  a  check, 
liability  of,  231. 

Innocent  purchaser  for  value,  who 
is,  224. 

International  law,  4. 

Irregular  indorser,  190. 

Joint  makers,  liability  of,  192. 
Joint-stock  company,  distinguished 

from  limited  partnership,  338. 
Judicial  decision,  authority  of,  10. 

Law,  classification  of,  3;  develop- 
ment of,  15 ;  divine  or  revealed,  3 ; 
international,  4;  making  of,  1; 
moral,  3;  municipal,  4;  of  human 
action,  2;  remedial,  14;  substan- 
tive, 12 ;  unwritten,  5 ;  written,  5. 

Legality  of  object,  necessity  for, 
92. 

Liability,  contracts  of  common  car- 
rier to  limit,  247;  contracts  of 
common  carrier  of  passengers  to 
limit,  256;  of  common  carrier,  for 
delay,  246;  termination  of,  248; 
when  attaches,  241 ;  when  shipper 
assumes  responsibility,  244;  of 
common  carrier  of  passengers, 
255;  for  baggage,  257;  termination 
of,  258 ;  of  estate  of  partner,  300 ; 
of  partner,  nature  of,  29(3. 

Lien,  of  common  carrier  for  price  of 
carriage,  251 ;  of  vendor  for  unpaid 
purchase  money,  169. 


Limited  partnership,  distinguished 
from  a  corporation,  33(5;  distin- 
guished from  a  joint-stock  com- 
pany, 338. 

Liquidated  damages,  116. 

Lost  instrument,  when  owner  of  may 
sue  upon,  191. 

Maker,  liability  of,  191. 
Marshalling,  doctrine  of,  298. 
Merger,  46. 
Misrepresentation,  78 ;  remedies  for, 

84. 
Mistake,  72 ;  effect  of  upon  contract, 

77. 
Moral  law,  3. 
Municipal  law,  4 ;  divisions  of,  12. 

Natural  laws,  1. 

Necessity,  agents  by,  265. 

Negotiable  contracts,  general  nature 
of,  175. 

Negotiable  paper,  how  it  circulates, 
188. 

Negotiation  of  bills  and  notes,  man- 
ner of,  213 ;  rules  governing,  223. 

Negotiation  prior  to  maturity,  213. 

Nominal  partners,  289. 

Notice  of  dishonor,  204 ;  by  whom  it 
should  be  given,  206;  manner  of 
serving,  207  ;  time  of  sending,  204 ; 
to  whom  it  should  be  given,  207 ; 
waiver  of,  211 ;  when  unnecessary, 
207 ;  where  it  should  be  sent,  206. 

Offer,  acceptance  of,  31 ;  making  of, 

29;  revocation  of,  37;  to  revoke, 

39;  when  operative,  38. 
Offer    and     acceptance,    26;     how 

brought  about,  28. 
Offeror,  assumes  risk  of  miscarriage, 

36. 
One-man  companies,  321. 
Oral  evidence ,  admission  of,  in  equity, 

123 ;  admission  of,  to  alter  written 

contracts,  120. 
Overdue  paper,  negotiation  of,  227. 

Partners,  agents  for  associates,  302; 
general  and  special,  336;  nature 


352 


INDEX 


of  liability  of,  296 ;  power  to  exe- 
cute sealed  contracts,  303;  power 
to  make  negotiable  contracts,  304; 
power  to  make  simple  contracts, 
302 ;  property  of,  291 ;  share  of  per- 
sonal property,  295;  what  each 
owns,  293;  who  are,  287. 

Partnership,  distinguished  from  a 
corporation,  306 ;  how  created,  287 ; 
how  dissolved,  305 ;  how  to  deter- 
mine existence  of,  288;  limited, 
distinguished  from  corporations, 
336;  power  to  sell  property  of, 
301. 

Payment  before  maturity  as  a  de- 
fence to  negotiable  paper,  221. 

Performance,  failure  of,  133;  made 
impossible  by  one  party,  132. 

Perpetual  succession,  310. 

Presentment,  200 ;  place  of,  202 ;  time 
of,  203 ;  to  whom  made,  301. 

Principal,  absolute  duties  of,  281 ; 
bound  by  apparent  authority  of 
agent,  269;  death  of,  285 ;  duty  of, 
to  compensate,  279;  duty  of,  to  re- 
imburse, 279;  insanity  of,  285; 
liability  of,  for  crimes  of  agents, 
274;  liability  of,  for  contracts  of 
agent,  267 ;  liability  of,  for  deceit 
of  agent,  272 ;  liability  of,  for  ma- 
licious wrongs  of  agent,  271; 
liability  of,  for  torts  of  agent,  270 ; 
responsibility  of,  for  injuries  to  his 
servant,  279;  who  may  be  a,  263; 
unnamed,  liability  of,  277;  un- 
named, rights  of,  278. 

Promissory  note,  definition  of,  176 ; 
essential  characteristics  of,  177; 
form  of,  177. 

Public  calling,  nature  of,  233. 

Public  policy,  contracts  contrary  to, 
94. 

Quasi  partners,  289. 

Ratification,  of  acts  done  by  unau- 
thorized agents,  266. 

Remedial  law,  14. 

Representation,  distinguished  from 
warranty,  79. 


Revealed  law,  3. 

Right  of  action,  discharge  of,  145. 

Rights  of  persons,  12. 

Rights  of  things,  13. 

Sale,  conditional,  161 ;  distinguished 
from  bailment  or  exchange,  148; 
how  to  make  contract  of,  148;  on 
condition  that  buyer  shall  be 
pleased,  161. 

Sale  or  return,  contracts  of,  164. 

Seal,  effect  of,  45;  necessity  for, 
46. 

Shares  of  stock,  personal  property, 
311 ;  transfer  of,  327. 

Special  partners,  336;  liability  of, 
336 ;  liability  of,  when  partnership 
irregularly  organized,  337. 

Specific  performance  in  courts  of 
equity,  141. 

Statute  of  frauds,  67 ;  effect  of,  upon 
unwritten  contracts,  69. 

Statute  of  limitations,  146. 

Stockholders,  liability  of,  316;  of 
irregular  corporations,  liability  of, 
319;  of  joint-stock  companies, 
liability  of,  337 ;  of  joint-stock 
companies,  liability  of,  when  com- 
pany irregularly  formed,  339; 
rights  to  receive  dividends,  325; 
rights  to  sell  shares,  310;  rights 
to  share  in  surplus  after  dissolu- 
tion of  corporation,  326 ;  rights  to 
vote,  323;  rights  with  respect  to 
management,  324. 

Stoppage,  in  transitu,  170. 

Sub-contractors,  liability  of,  for  act 
of  servants,  273. 

Subscribers  to  stock,  liability  of,  314. 

Substantive  law,  12. 

Survivorship  of  legal  title  to  prop- 
erty of  a  partner,  292. 

Title,  when  it  passes  by  contract  of 
sale,  157;  when  it  passes  under 
contracts  for  conditional  sales,  161. 

Title  of  partner,  survivorship  of, 
292. 

Torts,  liability  of  corporation  for, 
333. 


INDEX 


353 


Transfer  of  negotiable  paper,  rules 
governing,  223. 

Undue  influence,  90. 

Ultra  vires  acts,  liability  of  corpora- 
tion for,  332 ;  to  state,  334. 

Undisclosed  principal,  liability  of, 
277 ;  rights  of,  278. 

Unwritten  law,  5. 


Warrant,  implied,  by  manufacturer, 
168;  implied,  of  quality,  167. 

Warrant  of  attorney,  47. 

Warranties,  express,  166;  implied, 
of  title,  166. 

Warrants,  remedies  for  breach  of, 
169. 

Written  law,  5. 

Wrongs,  private,  13;  public,  13. 


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